As we head into the second quarter of 2012, we continue to target companies which we believe are well positioned to benefit from rising domestic demand and infrastructure development across the region.
In the current environment, we particularly favour markets and sectors which exhibit strong domestic dynamics, thus providing a degree of shelter to any external shocks. The rise of the Asian consumer is one of the key long-term themes arising from the ongoing economic development of the region, particularly Asia's fast-growing and increasingly affluent middle-class.
China - opportunities in the IT and Consumer sectors
While growth remains high across the wider economy, Chinese equities have continued to be a source of frustration for investors attracted to the low valuations on offer.
Our current China exposure is largely though Consumer and Information Technology firms, sectors which benefit from the structural increase in domestic consumption and are less dependent on government policy. Indeed, we are generally more cautious on the short-term outlook for policy sensitive areas such as banks and property as we do not foresee Chinese policymakers cutting interest rates in the short-term, particularly with inflationary pressures only slowly coming under control.
Elsewhere, we are content to maintain our underweight position in Hong Kong. Performance of the heavyweight property sector has been negatively affected by the recent arrest of the co-chairmen and co-managing directors of Sun Hung Kai Properties and the political ramifications for the rest of the sector appear unclear at this time.
Positive on Korea; more cautious on Taiwan
Korea, meanwhile, remains a fertile ground for good stock selection opportunities, in our view. Here, we favour globally competitive brands such as Hyundai Motor and Samsung Electronics, with the latter benefiting from strong earnings momentum due to the rapid growth of the smartphone market. We believe Korean Financials are also attractive due to attractive share price valuations, while selected Industrials stocks such as Hyundai Heavy and Samsung Engineering should continue to see robust order book wins, in our view.
The outlook for Taiwan is more uncertain given that signs have recently emerged that the government could move to introduce a capital gains tax on property and securities transactions. Our holdings in Taiwan are therefore concentrated in the Information Technology sector and beneficiaries of continued strong demand growth for Apple products.
ASEAN economies continue to outperform
In South East Asia, the ASEAN markets had their third consecutive year of outperformance in 2011 and regional economies have generally started the year on a strong footing. Thailand has led the way in this regard as the economy continues to recover from the widespread flooding in 2011. In particular, we see attractive opportunities in Thai banks which are enjoying strong loan demand from domestic corporates looking to increase capital expenditure. We believe that a combination of robust earnings momentum and attractive valuations further supports the outlook and Thailand remains one of our preferred markets in the region.
We are also upbeat on Indonesia and we are particularly encouraged by the recent decision of ratings agencies Fitch and Moody's to upgrade the country's long-term foreign and local currency rating to investment grade. In our view, a reduction in the cost of capital should lead to a marked acceleration in fixed asset investment, with positive implications for a range of infrastructure-related sectors. This argument is further supported by the recent passing of the Land Acquisition Act, which will aim to tackle long-standing bottlenecks and promote government projects.
Indonesian equities registered resilient performance in 2011, but recent performance has been constrained by concerns that the government could move to cut fuel subsidies, potentially hastening an increase in inflationary pressures. The original bill has since been voted down in parliament and the negative impact on domestic equities has created some attractive buying opportunities for long-term investors. More generally, we remain very positive on the long-term outlook for Indonesia given the rapid growth in domestic consumption and infrastructure development.
The Philippines has a number of similar traits to Indonesia such as a young and fast-growing population and an improving fiscal position, while infrastructure bottlenecks are also finally being tackled by the recent implemented public-private partnership programme. Our regular schedule of company meetings continues to underline the strength of business confidence amongst Philippines companies, although we are mindful that valuations are beginning to look somewhat stretched following a period of strong performance.
Although Thailand has been the standout performer in ASEAN over recent months, Singapore has also witnessed a broad-based rally as a result of very depressed valuations. Following recent strong performance, we do not see much value in Singapore, while government policy will also likely curtail performance in the important property sector over the coming months.
We are also relatively cautious on the prospects for Malaysia as we believe the defensive nature of the market will likely hinder performance relative to other regional economies. Political elections are due to be held in the middle of the year and a sustained pre-election rally currently looks unlikely due to a combination of high valuations and ongoing uncertainty surrounding the outcome of the election.
The outlook from here
The Asia ex Japan region has been a strong performer in recent months, with the MSCI AC Asia ex Japan Index generating a total return of 13.8% in US dollar terms in the first quarter of 2012. Despite this, we believe that regional equities generally remain attractively valued and we expect markets to continue to deliver strong returns over the coming months.
Against an improving macroeconomic backdrop, we expect companies with what we believe are good growth prospects and strong balance sheets and are well positioned to benefit from infrastructure development, rising domestic consumption and the secular boom in soft and hard commodities, to do well in 2012.
Colin Ng
Head of Asian Equities
Investment Manager, Baring Asia Growth Fund & Baring Eastern Trust
Baring Asset Management, Hong Kong
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