The various equity markets in the Far East ex Japan sector have had diverging performance since the ...
The various equity markets in the Far East ex Japan sector have had diverging performance since the beginning of the year and fund managers are having to be very selective in their asset allocation to beat the index.
Ashok Shah, fund manager at Old Mutual Asset Managers, says that some of the smaller markets, such as Indonesia, the Philippines and Thailand, have been out of favour since the beginning of the year.
All three markets are down approximately 30% year to date. Overall, he sees them as still embedded in the Asian crisis of three years ago, and although the economic conditions have improved the political and corporate environments have not.
"In Indonesia, investors have been concerned about the violence in the outer provinces, the lack of strong leadership, the state of the banking system and a recent run on the currency," he says.
"I expect it will take many months for it to come out of the turmoil and since the Indonesian equity market is already such a small part of the index, we have chosen to ignore it.
"The Philippines equity market is suffering from the accusation of cronyism in the government, rising bond yields and falling foreign investment. Although share prices look cheap, it is best to be underweight the market for now.
"Although the political situation in Thailand appears quite stable, the equity market is concerned about the level of non-performing loans and the lack of transparency at the Thai central bank. It was recently announced that there is $20bn more overseas borrowing than had been announced before."
One of Ashok's favourite markets is Korea, which he says is driven by demand for technology, and there are no signs that this is slowing down. His major concern there is a potential programme to expand capacity because of high levels of capacity utilisation.
He says: "Of course, the way it works usually is that everybody adds capacity at the same time, which means pressure on interest rates and possible oversupply in the future."
Ashok's funds have a full weighting in Taiwan. He believes that although posturing with China will continue, most investors are getting used to it and prefer to focus on economic fundamentals. With good growth and low inflation, the market is seen as a good long-term bet.
Hong Kong is showing signs of having come through the worse of the downturn, according to Ashok. Domestic demand is picking up and the property market is improving. As long as interest rates are not seen as having much higher to rise, the market should be supported.
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