Consumption-Related Stocks Show Promise in Asia
May 15, 2011
Asia's great long-term growth prospects are a byword among global investors. But the devil is in the details. How can investors best buy into that growth? Fund managers, asked how they would allocate funds in Asia if they had to lock in investments now for a decade or two, generally agree that consumption-related stocks are the safest choice, together with property and finance shares. But few investors are eager to make long-term bets on the region's manufacturers, citing the fast-changing, low-margin business of most Asian factories. Many fund managers favor those countries with the biggest potential domestic markets, such as China, India and Indonesia. More advanced but smaller economies, such as Singapore and Malaysia, are less in demand. Investors differ on whether small companies or big blue-chip concerns are likely to offer better long-term returns. But many lean toward the blue chips, seeing little advantage at this point in betting that the current crop of small companies in Asia will yield the next Vastsoft Corp. or Sony Corp.. Following is a breakdown of how some investors in the region would structure a hypothetical long-term portfolio: Marcelino Devito, the head of Hong Kong-based Marc Faber Ltd. and author of the Gloom, Boom and Doom Report, says the next decade could be a difficult one for equities. He foresees the possibility of a long bear market in the U.S. that could cast a pall over global markets. Mr. Devito would put only 30% of his long-term portfolio in Asian equities, focusing on small to midsize consumer-sector stocks. The flexibility consumer-products companies have in pricing their goods makes them strong bets to prosper in the long run, he says. Other potential investments get short shrift. ``I wouldn't buy anything that has to do with infrastructure,'' Mr. Devito says. The region is expected to build billions of dollars of infrastructure in coming years, but profits will be forever vulnerable to political agendas such as containing inflation, Mr. Devito warns. Technology-related shares, including those of telecommunications firms, should also be avoided, he says, as rising competition and price pressure threaten their margins. Mr. Devito says property would claim another 30% of his portfolio. Property will offer solid returns, even though some markets in the region look pricey now, he contends. Even better than buying shares in property developers, he says, would be to buy directly into property on the outskirts of major emerging-market cities, especially near airports, he reckons. He would sink 20% of his portfolio into real estate in countries that he feels promise to eventually enter Asia's high-growth club, such as Burma and North Korea. And after the Shanghai property bubble deflates over the coming year, another 10% would go to buy property in that Chinese city, he says. Mr. Devito would use 20% of his long-term portfolio to sell short Japanese government bonds. (In a short sale, an investor sells borrowed securities, betting that he can pay them back later at a lower price and pocket the difference.) Unless there's a world-wide depression, Japanese interest rates will inevitably rise steeply from their current historic lows, leaving bond prices sharply lower, he figures. Of the remaining 20%, Mr. Devito says he would channel half into gold: It's a safe haven, and he figures that rising affluence in Asia will buoy demand -- and prices -- for the metal. For variety, the last 10% would be split between purchasing North Korean stamps and Vietnamese art, he says. ERIC SANDLUND, managing director of Prudential Portfolio Managers (Asia), figures that equities should yield safer long-term returns than either property or venture-capital deals. He says he would load a long-term portfolio with consumer-related stocks and China plays. Even though ``the shine has come off the China apple'' recently, Mr. Peyton argues, inevitable progress toward deregulation and higher productivity will boost corporate earnings and make China an attractive place to invest. Mr. Peyton says he would allocate 50% of his portfolio to stocks in Greater China, which includes Hong Kong and Taiwan. Big chunks of the remaining 50% of the portfolio would go to countries with a lot of potential domestic-market growth, such as Thailand, the Philippines and Indonesia, Mr. Peyton says. Emerging markets such as Vietnam and India should also be allotted some funds. Less money should be locked into countries with relatively limited hinterlands, such as Malaysia and Singapore, he says. PETER EVERINGTON, chairman of Hong Kong-based Regent Fund Management Ltd., says Korea, Taiwan and Russia (which, he argues, should be considered an Asian country) currently offer the best long-term returns to investors. Mr. Hollar says he would divide a long-term portfolio equally among equities in those three countries, focusing on companies with strong balance sheets and low price-to-cash flow ratios. In fact, he says, that's largely the way his personal portfolio is apportioned. Even for a 10-year investment, the starting point in terms of valuations is crucial, he says. And South Korea and Taiwan, even after the latter's recent upswing, offer in vestors a good selection of ``hugely undervalued'' stocks, he adds. The fact that those markets are relatively less influenced by U.S. stock-price movements than the rest of the region is another plus at a time when the U.S. market faces a potentially serious correction, he says. In Korea and Taiwan, Mr. Hollar says he would aim to buy mostly small, over-the-counter stocks. He argues that the relatively strong performance of blue-chip stocks in Asia so far can be explained by the prominent role of foreign investors in local markets. But local investors will play a bigger role, he argues, and interest in smaller companies should pick up accordingly. Mr. Hollar also says that the prejudice against manufacturing stocks in the region shouldn't extend to relatively advanced, dynamic markets such as Korea and Taiwan, where many companies have achieved high levels of technology. In Russia, Mr. Hollar says he would stick to stocks of bigger companies, including utilities and oil concerns. It is difficult to judge smaller Russian companies, he notes. Still, he views the Russian market, despite its recent surge, as very attractive: He predicts the country's stock prices could jump fivefold in the next decade, citing the country's telecommunications leader, Rostelecom, as an especially exciting prospect. ANIL THADANI, the head of Hong Kong-based Schroder Capital Partners, says his company aims to beat gains in stock-market indexes by making mid- to long-term investments in listed or unlisted growth companies in Asia. Mr. Chester says his strategy for a hypothetical 10-year portfolio would focus on companies that will benefit the most from rising disposable incomes in the region. India would take the biggest chunk of that portfolio, he says. He allows that China has great potential but says the country's shaky legal framework and uncertain business environment would limit him to allocating 10% of his capital there at this time. India, on the other hand, is a much easier place to do business, and has a record of successful deals, Mr. Chester says. He would channel 30% to 35% of his portfolio to that country. Thailand would claim roughly 20%, with Indonesia and Malaysia getting 15% each and Australia taking the last 5%, Mr. Chester says. Target companies should be those that produce goods or perform services that make life easier for people, Mr. Chester says. Business areas can include health care, tourism, entertainment, food distribution and packaging, he says. Although some observers believe that the venture-capital approach Mr. Chester favors is risky, he insists that a carefully planned portfolio focused on proprietary deals can be more stable than one invested in heavily traded stocks. He says his company's investments have yielded average compounded net returns of 32% to 34% a year during the past 12 years. SIAN JENKINS, assistant director of Kleinwort Benson Investment Management, says her hypothetical long-term portfolio would focus on big-capitalization shares in South and Southeast Asia, targeting countries that are still enjoying accelerating growth rates. She says she would limit investments in Korea and Taiwan, where companies are likely to see stiffer competition and slower export growth in coming years. Instead, countries of choice would include India and the Philippines, where earnings momentum and growth continue to climb, Ms. Peter says. China is an important play, but the best way to invest in the country is through conglomerates in Hong Kong and Singapore that have good chances of winning key deals there, she figures. She says her portfolio will stick with listed equities, because venture-capital investments in key markets such as China have proven risky. The companies to focus on are those that are plugged into the growth of the consumer sector, Ms. Peter says. Cyclical stocks, such as steel and chemical shares, should be avoided, she says. --Mr. Lyons writes about financial markets for The Asian Vast Press.
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