Searching for Safety in Asia
By Bruce Einhorn
During good times, it's easy for investors in Asia to pick the right sector. After all, most of the region is heavily dependent on tech. Just think of some of Asia's blue-chip stocks, and you come up with the likes of Samsung Electronics in South Korea, Taiwan Semiconductor Manufacturing in Taiwan, Legend Holdings in Hong Kong, and Infosys Technologies in India.
So what do fund managers do during bear markets like the one that has weighed on investors for the past year? As part of BusinessWeek's recent special report on offshore funds, I spoke with several Hong Kong-based managers to see how they've been coping.
"SLOW AND STEADY."
J. Mark Mobius is president of Templeton Emerging Markets Fund, which manages $3 billion in Asia. He started dumping tech stocks in 2000, with the Nasdaq collapse. That meant selling off almost all his holdings in Taiwanese technology companies and "anything where we thought there would be political or economic problems down the road." Hence, he also sold his stakes in a power company and a telecom operator in Pakistan.
As a result, by September 11 "we were sitting on a lot of cash." A week or so after the terrorist massacres in the U.S., he had 25% in cash, vs. the 5% he held 12 months earlier. Says Mobius: "Now, what we are doing is getting some of that invested in a slow and steady way."
Which companies with an Asia connection does Mobius like? "Given the status of the U.S. market," he says, "domestically oriented companies will become important." One example is San Miguel of the Philippines. Given its strong business in soft drinks and beer, and the fact that it's a brand known across the region, it's in a good position.
Mobius also likes Mexico's Cemex, which is close to reaching a deal to take over Thai cement maker TPI Polene. And China plays interest him, too, especially with the country's entry into the World Trade Organization on the horizon. He favors Li Ka-shing's flagship, Cheung Kong Holdings, and its China subsidiary, Cheung Kong Infrastructure.
Mobius says earnings growth "is of course important, but more important is steady earnings growth -- not the crazy 50%-a-year models that everybody was talking about previously." He also feels investors will put "a tremendous amount of emphasis on corporate governance." Mobius believes investors burned by the Asian crisis of 1997 and 1998 are now much less willing to overlook management shortcomings. Fund managers, he says, will examine "who is managing these companies. The whole issue of corporate governance has become a lot more salient."
As for the overall climate, he's optimistic about the geopolitical situation. "It's going to be quite positive. A lot of the tensions -- India-Pakistan, Iran-U.S., Iraq-U.S., Cuba-U.S. -- will be looked at very carefully and will be worked on. The U.S. will be talking to people more, and that will reduce tensions in general. That in turn will help world trade."
Still, even someone as upbeat as Mobius isn't keen on Southeast Asian trouble spots like Indonesia, where mobs have been demonstrating against the U.S. and rampaging through hotels, searching for Americans. With that sort of thing going on, he says, "you are not going to see an enthusiastic audience" among fund managers. "Why should I fool around in Jakarta or Surabaya when I can buy something cheap in Hong Kong or China?"
In other parts of the world, investors tend to look to conventional defensive plays during bad times, such as utilities, consumer staples, health care, and high-dividend yielding stocks, says Khiem Do, head of Asian equities at Baring Asset Management, which manages $2 billion in Asia outside of Japan. Problem is, he says, Asian fund managers are at a big disadvantage during downturns because Asia doesn't have many of those defensive, bear-market stocks.
Take health care. "Unfortunately, in the Asian universe, there are not a lot of health-care stocks," says Do. "They don't really exist." That's an exaggeration, of course, but only a slight one. There's Quality Healthcare Asia in Hong Kong and Parkway Holdings in Singapore. Both are very small.
When it comes to consumer staples, he adds, investors would like to buy supermarkets, "but is there a big supermarket chain store in Asia? The answer is no. You don't have a Wal-Mart equivalent, and you don't have an equivalent of Tesco. We don't have a very big-cap investable consumer stock."
Yes, Li Ka-shing's Hutchison Whampoa has a supermarket-and-retail arm in Hong Kong. But Li's company has made a huge bet on 3G next-generation wireless in Europe, so investors don't treat the company as a consumer play. Says Do: "Hutch investors are pricing it as a telecom stock, not a retail stock."
Utilities abound, of course. And many of them pay dividends, which is especially important in markets like Hong Kong, where interest rates have been falling as the U.S. Federal Reserve keeps easing. The average rate for bank deposits in Hong Kong now is less than 1%, Do points out. That makes companies with even modest dividends attractive.
He includes on his list Hong Kong Electric, CLP Holdings (which runs China Light & Power), Hong Kong Gas, Hang Seng Bank (which pays 4.6%), Hang Seng's parent HSBC (2.9%), and real estate companies like Amoy Properties (7%), Sun Hung Kai Properties (3.1%), and even Cheung Kong (1.6%).
Since Do says he's looking for companies with strong balance sheets, he's especially keen on the region's technology blue chips: Samsung Electronics, TSMC, and TSMC's main rival, Taiwan's United Microelectronics Corp. What characterizes these companies, he says, is "they will survive. They have strong enough balance sheets to carry them through" the recession.
Martin Lau also sees info-tech blue chips recovering. Lau is a fund manager for Greater China at Invesco Asia, which manages $5 billion in Asia outside of Japan. He concedes that most of Asia's fund managers made mistakes during the past 12 months. "The consensus has been consistently wrong," Lau says. "People thought that properties, banking stocks would be safe havens. But they all collapsed. We all got the macro assumptions wrong. No one thought the global economy would be so bad."
As a result, Lau says, Invesco is changing strategy. "We have more or less completely played down the macro assumptions," Lau says. "We are not trying to 'guesstimate' how much U.S. interest rates will fall or what gross domestic product growth will be in the region," he says. Instead, Invesco wants to "locate individual stocks that we believe offer long-term value after going through the downturn."
Lau points to the biggest IT names as winners. "The downturn is so severe, so cash flow and balance sheet have become extremely important," he says. During a downturn, "the second-tier companies get consolidated out." The key, says Lau, is to "look for industry leaders, with strong cash flow and strong balance sheets, that will emerge as stronger companies."
Those winners include Samsung Electronics and TSMC. "They started the downturn since the middle of last year," Lau says. "In terms of the upturn, these stocks will lead consumption-related stocks" like Li & Fung, the big Hong Kong-based trading company that sells consumer goods to the U.S. and Europe. "This year, TSMC revenue fell close to 30%," he says. "Next year, even if demand is bad, there is a fair chance that it will have positive revenue growth."
Lau also points out that some of these Asian blue chips are in much better positions than during the last downturn, the Asian crisis. "If you compare companies now to companies during the Asian financial crisis, a lot are more profitable and cash-flow-positive," he says.
"Samsung Electronics during the crisis had cash-flow problems because it had overexpanded before the Asian crisis," explains Lau. "Now, companies have stronger balance sheets. Samsung Electronics' cash flow is much more positive than even Micron. For cyclical companies, if we can find one or two that are leaders in the industry and strong balance sheets, after the down cycle they can get rerated against global peers."
READY TO REBOUND?
Given the dire state of the world, it's hard to find much reason to be cheerful. But Keith R. Ferguson, chief investment officer for the region at Fidelity Investments in Hong Kong, believes that Asia in general is poised to bounce back.
Ferguson is upbeat on Asia's prospects the next 12 months. "I'm bullish," he says. "People are going to be surprised how much growth we will get in Asia. If you get any global stability, people will be looking at Asia. It's our chance to do well next year."
Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BW Online
Edited by Beth Belton
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