Asian Investment Manager Outlook Date: May 2011 Author: Sarah Lien Senior Research Analyst, Russell Investments Country: Synopsis: Asia Russell s half-yearly survey of Asian investment managers and their views of the market
RUSSELL INVESTMENT MANAGER OUTLOOK Introduction Following on from the success of Russell s North American and Australian Investment Manager Outlooks (IMOs), this is the first IMO covering the broader Asian region. The Asian IMO surveys investment professionals on contemporary market themes, eliciting insights which are highly relevant to investors. At Russell we synthesise the survey results of approximately forty investment managers and provide an aggregate outlook on specific markets and sectors within Asia. Russell Investments // Asian Investment Manager Outlook / May 2011 p 1
Regional view Geopolitical events and natural catastrophes exerted significant influence over global and domestic markets for the quarter to 31 March 2011. Despite a strong start to the quarter for global markets with positive economic data coming out of the United States and China, sentiment was affected in March by ongoing political and civil upheaval in the Middle East, strong commodity prices sparking inflationary pressures and a magnitude 9.0 earthquake in Japan, followed by a tsunami which triggered a nuclear crisis. In this survey we profile how the managers view the market environment and where they believe there are the best investment opportunities as well as challenges. The results of this survey reveal a strongly growth-driven theme when it comes to money manager market preference. We asked managers to indicate markets that they view favourably and 63% of surveyed managers feel that the Asia region is the most attractive investment market. Clearly the growth prospects in Asia are perceived to outweigh those of the US (14% of the vote) and Europe (11% of the vote), reinforcing Asia as a market with a compelling secular growth story, albeit one with near term cyclical stress (addressed later in the IMO). Importantly the results do not speak to a simple preference for developing markets over developed markets; only 11% of surveyed managers favour Emerging Markets ex Asia. In this survey we profile how the managers view the market environment and where they believe there are the best investment opportunities as well as challenges. Exhibit 1: Manager preferences Investment Markets Europe Emerging (ex Asia) US Asia 0% 10% 20% 30% 40% 50% 60% 70% 80 Russell Investments // Asian Investment Manager Outlook / May 2011 p 2
COMMENTARY & ANALYSIS Manager s view on specific Asian markets Low levels of government debt, strong demographics, growing domestic demand and rapid urbanisation typically underpin Asian economies. Drilling down to the country level, however, it is apparent that managers perceive distinct relative differences among markets in the region. Specifically, managers are most optimistic on China, with a total bullish rating of 55%, whereas only 12% are bearish. China is currently undergoing rapid industrialisation, as well as making a concerted push to move up the value chain. Coupled with strong demographics, there are significant opportunities to invest in a range of promising Chinese companies which are steadily becoming dominant in their fields. Korea is the only other country where 45% of managers are notably bullish and only 15% are bearish. Unlike the Chinese market, the Korean market was one of the top performers in the Asian region during 2010 owing to its thriving industrial, technology and automotive production facilities. However, as we saw in February, Korea is quite susceptible to an oil shock with oil being a key input into many areas of industrial and chemical production. Managers are most pessimistic on India and Indonesia, with 56% of surveyed respondents applying a bearish rating and only 9% with a bullish stance on both markets. The Indian market has been left reeling after a series of negative events which have clearly had a significant impact on sentiment. Over the last three months Indian stocks have endured sizeable declines. In January the domestic Sensex Index suffered its most significant monthly fall in more than two years on the spread of unrest from Tunisia to Egypt and elsewhere. In addition there has been rampant domestic inflation and a significant corruption scandal in the telecommunications industry. Indonesia is also equally viewed through a bearish lens. Like India, managers have identified this market as being very vulnerable to inflationary pressures and valuations are expensive. In relation to the non-core Asian markets, there is also a broad divergence of opinion. Specifically in this group, managers find Malaysia most attractive (43% of managers) followed by the Philippines (26% of managers). Malaysia is one market in particular which is poised to benefit from higher oil prices it is largely an oil exporting nation with companies such as Petronas Chemicals Group and Perisai Petroleum Teknologi. Exhibit 2: Manager preferences Non-Core Asian Markets New Zealand 0% Sri Lanka 6% Vietnam 14% Thailand 23% Philippines 26% Malaysia 43% 0 10 20 30 40 50 Russell Investments // Asian Investment Manager Outlook / May 2011 p 3
COMMENTARY & ANALYSIS Manager s sector level perspective At a sector level, managers appear to be most positive on sectors which will be the biggest beneficiaries of increased domestic demand. It ties in, therefore, that the bullish ratings for the Financials, Consumer Discretionary and Consumer Staples sectors are 63%, 59% and 50%, respectively. Managers feel that it is the Financial and Consumer sectors which are relatively more resilient given lower earnings volatility and structural internal growth drivers. This supports our observation of a strongly growth-driven theme in managers preference and willingness to take on higher risk. Other cyclical sectors which rate well are Information Technology (at 59% bullish) and Energy (at 53%). The latter sector is unsurprising given the recent surge in oil prices; interestingly, the similar spike in most other resources is not reflected in sentiment towards the Materials sector where managers are only 42% bullish with 19% bearish. It is also clear that sentiment towards the Information Technology sector is noticeably positive and can, to a certain degree, be attributed to the crisis in Japan. The earthquake and tsunami have forced a number of factories and plants to halt production, with continued rolling blackouts also having a detrimental impact. Managers are of the belief that investors will turn to other IT hubs in the Asian region that can pick up the slack capacity left in the wake of the twin natural disasters. Managers are overwhelmingly bearish on defensive sectors such as Property REITs, Utilities and Telecommunications with bearish figures of 53%, 56% and 34%, respectively. Managers are generally wary of these sectors because, as a general rule, policy and regulatory risks tend to be higher in sectors like Telecoms and Utilities. Exhibit 3: Manager expectations by sector REITS / PROPERTY 9% 53% UTILITIES 19% 56% TELECOMMUNICATIONS 19% 34% HEALTHCARE 35% 16% MATERIALS 42% 19% INDUSTRIALS 47% 28% CONSUMER STAPLES 50% 16% ENERGY 53% 13% INFORMATION TECHNOLOGY 59% 9% CONSUMER DISCRETIONARY 59% 16% FINANCIALS (EX PROPERTY) 63% 22% = % Bullis h 1 = % Bearis h 2 Russell Investments // Asian Investment Manager Outlook / May 2011 p 4
COMMENTARY & ANALYSIS The biggest risks facing markets in 2011 This quarter s IMO also surveyed managers regarding their opinion on the biggest risks to markets in 2011. Inflation topped the list with 86% of respondents indicating that this was a significant threat to Asian market growth. Already in 2011 we have observed the impact of higher agricultural and energy prices on stock markets like India where the headline inflation rate was last reported in March at 8.98%. It is important to note that in many developing Asian countries expenditure on food often represents 30-50% of the average household budget. Governments often subsidise food; nonetheless, rampant agricultural commodity prices will definitely hamper Asian growth rates and this concern has made its way into the survey results. Inflation topped the list with 86% of respondents indicating that this was a significant threat to Asian market growth. Higher inflation goes hand in hand with the next biggest rated risk: higher interest rates, with 57% of managers flagging the issue. With real interest rates in many parts of Asia still negative, the prospect of rising inflation may lead to more aggressive monetary tightening in the coming months. China is an example of a country which has taken an aggressive stance towards inflation, hiking rates four times since October 2010. While a necessary move, there is a concern that China may overtighten, with high rates stifling growth and investment. A stronger currency, which would normally follow rate tightening, doesn t seem to be much of a concern surprisingly, with only 17% of managers rating this as a risk. This speaks to how Asian economies are gradually becoming more focused on internal demand and consumption and are moving away from their export driven growth models which are highly sensitive to appreciating currencies. Reinforcing this is the fact that only 9% of managers rate weaker exports as a significant risk. Valuation of the market Managers are very constructive on their perspective of the current market s valuation. Specifically, 43% of surveyed managers feel that Asian markets are fairly valued, with 30% of the belief that the market is in fact undervalued. This perspective is shared by Russell we generally view the share market valuation as neutral for Asia ex Japan. We agree that share markets have upside, but we re wary of some of the more bullish forecasts. In the same way that investors became too gloomy towards the middle of last year, there is a risk that positive economic news is being over-extrapolated. At the current neutral valuation levels, managers tend to view any future market correction as healthy, providing an opportunity to look for bargains. Valuations remain reasonable and corporate profits have generally been strong, supportive for those investors who are looking to enter Asian markets. Managers also recognise that global investors are typically underweight Asia in global portfolios. Given the prospects for Asian markets and the expected fragility and subdued growth of developed markets, it is expected that an ongoing rebalance will take place at the expense of developed markets. Russell Investments // Asian Investment Manager Outlook / May 2011 p 5
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