First State upbeat despite China caution
By Simona Stankovska
Inflationary pressures in China are a serious risk to Asia-Pacific markets, especially if expectations of further price rises get embedded in the popular psyche, says Angus Tulloch, manager of the £5.39bn ($8.8bn) First State Asia Pacific Leaders fund.
In line with this view, Mr Tulloch is taking a cautious approach and positioning the fund conservatively.
He attributes recent underperformance to this caution, saying the fourth quartile positioning in the IMA Asia ex Japan sector over the three months to April 30 was due to the lack of exposure to Australian, Chinese, Hong Kong, Korean or Taiwanese banks, which performed strongly up until the end of March.
The fund returned 0.7 per cent compared with 3.6 per cent for the benchmark MSCI AC Asia Pacific ex Japan Index, and the sector average of 2.3 per cent.
Mr Tulloch has added Taiwan-based Siam Commercial Bank to the portfolio, but has no plans to add Australian, Chinese or Korean banks, arguing there is cause for concern over their loan-to-deposit ratios – which are around 140 per cent – and their dependence on overseas wholesale deposits. He prefers the banks he invests in to have a ratio closer to 100 per cent.
However, the fund does have a large (10 per cent) exposure to Singaporean banks, which Mr Tulloch believes to be highly regulated and have a relatively large capital adequacy ratio. Oversea-Chinese Banking Corp represents 4 per cent of the portfolio and is one of his top 10 holdings. He says its unique selling point is its structure: it is family-owned but run by professional managers – a “very strong combination”, according to Mr Tulloch.
Another area Mr Tulloch is keen on is telecoms. He thinks mobile data is going to be a strong growth area in Asia. Although they are out of favour at the moment, he says mobile phone companies such as China Telecom and AIS Thailand are reasonably priced, making them a worthwhile investment.
“You should take a two to three-year view; we think growth will return in earnings to the sector and these companies will benefit considerably. In the meantime, you’re being paid to hold with very generous dividend yields – 4 per cent in Chinese yuan, renminbi or in Singapore dollars is an extremely attractive yield.”
The third largest holding in the portfolio, at 6.5 per cent, is manufacturing firm Taiwan Semiconductor. Mr Tulloch says the company’s essential components for iPads and other tablets are in demand and it is “technologically well ahead of everyone in Asia”.
In fact, he says, it has accounted for all of the profits made in that sector over the past 10 years, making it a steady performer. Mr Tulloch also believes the company will benefit from the earthquake and tsunami in Japan, as people buying components from Japan are going to want a second supply source.
Cheung Kong Holdings, his fourth largest holding at 6.1 per cent, is a perfect example of a company with strong leadership, says Mr Tulloch.
“We’re banking on [chairman and founder] Lee Ka- shing’s judgment and long-term track record. Also they’re pretty cautious as a group and have been deleveraging quite considerably by floating assets on the market, which gives us a degree of comfort.”
Simona Stankovska is features writer at Investment Adviser, a Financial Times publication.
Inflationary pressures in China are a serious risk to Asia-Pacific markets, especially if expectations of further price rises get embedded in the popular psyche, says Angus Tulloch, manager of the £5.39bn ($8.8bn) First State Asia Pacific Leaders fund.
In line with this view, Mr Tulloch is taking a cautious approach and positioning the fund conservatively.
He attributes recent underperformance to this caution, saying the fourth quartile positioning in the IMA Asia ex Japan sector over the three months to April 30 was due to the lack of exposure to Australian, Chinese, Hong Kong, Korean or Taiwanese banks, which performed strongly up until the end of March.
The fund returned 0.7 per cent compared with 3.6 per cent for the benchmark MSCI AC Asia Pacific ex Japan Index, and the sector average of 2.3 per cent.
Mr Tulloch has added Taiwan-based Siam Commercial Bank to the portfolio, but has no plans to add Australian, Chinese or Korean banks, arguing there is cause for concern over their loan-to-deposit ratios – which are around 140 per cent – and their dependence on overseas wholesale deposits. He prefers the banks he invests in to have a ratio closer to 100 per cent.
However, the fund does have a large (10 per cent) exposure to Singaporean banks, which Mr Tulloch believes to be highly regulated and have a relatively large capital adequacy ratio. Oversea-Chinese Banking Corp represents 4 per cent of the portfolio and is one of his top 10 holdings. He says its unique selling point is its structure: it is family-owned but run by professional managers – a “very strong combination”, according to Mr Tulloch.
Another area Mr Tulloch is keen on is telecoms. He thinks mobile data is going to be a strong growth area in Asia. Although they are out of favour at the moment, he says mobile phone companies such as China Telecom and AIS Thailand are reasonably priced, making them a worthwhile investment.
“You should take a two to three-year view; we think growth will return in earnings to the sector and these companies will benefit considerably. In the meantime, you’re being paid to hold with very generous dividend yields – 4 per cent in Chinese yuan, renminbi or in Singapore dollars is an extremely attractive yield.”
The third largest holding in the portfolio, at 6.5 per cent, is manufacturing firm Taiwan Semiconductor. Mr Tulloch says the company’s essential components for iPads and other tablets are in demand and it is “technologically well ahead of everyone in Asia”.
In fact, he says, it has accounted for all of the profits made in that sector over the past 10 years, making it a steady performer. Mr Tulloch also believes the company will benefit from the earthquake and tsunami in Japan, as people buying components from Japan are going to want a second supply source.
Cheung Kong Holdings, his fourth largest holding at 6.1 per cent, is a perfect example of a company with strong leadership, says Mr Tulloch.
“We’re banking on [chairman and founder] Lee Ka- shing’s judgment and long-term track record. Also they’re pretty cautious as a group and have been deleveraging quite considerably by floating assets on the market, which gives us a degree of comfort.”
Simona Stankovska is features writer at Investment Adviser, a Financial Times publication.
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