Register to get unlimited access to all of Citywire’s fund manager database. Registration is free and only takes a minute.

North Korea's impact on asset allocation

Has the lingering threat from Pyongyang affected fund selectors' asset allocations in Asia?

Sentiment at a glance

The general consensus is pointing towards a positive view on Asian equities, despite the continuing geopolitical tension between North Korea and the US. Thanks to the region’s strong economy and recovery in global trade, Asia is still recognised as a hotspot for investment.

Given Asia’s high level of operating leverage, robust economic growth helps to lift earnings. According to Citi’s Florence Tan, earnings are  forecast to grow 21% in 2017 and 10% in 2018.

Maybank’s Alice Tan says the private bank is positive about Indonesia, Malaysia and Thailand, in addition to South Korean equities for their  strong corporate earnings.

UBS’ Hartmut Issel is recommending long Chinese equities versus short Taiwanese equities, and long Indonesian equities versus short Philippines equities. Reyl, however, currently gains its Asian equity exposure through a mix of direct stock picks, in-house products and third party country funds, Daryl Liew says.

‘Going forward, steady Chinese data would be supportive of Asian stocks, though the mercurial Chinese economy is always hard to fathom,’ Jay Roberts from RBC notes.

 

This article was published in the October issue of the Citywire Private Wealth magazine.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Alice Tan, Maybank Private Wealth

Singapore

The IMF has announced that it expects the Asia Pacific region to be the world leader in growth, with a growth projection of 5.5% for 2017. In Asia, we continue to hold positive views on Indonesia, Malaysia and Thailand as buoyant exports and government spending continue to support economic growth.

Despite being at the centre of geopolitical volatility, we like South Korea equities for their strong corporate earnings, which are driven by strong demand for IT supply chain manufacturers as well as the prospect of improving corporate governance.

China has been able to avert a sharp drop in economic growth and large defaults despite the aggressive deleveraging programme. In our view, further implementation of economic and market-oriented reforms should continue to support China’s outperformance.

Bouts of volatility should be expected, and we continue to focus on managers who are able to deliver superior performances and manage risks well.

The First State Dividend Advantage fund, which is suitable for clients who want a defensive Asia Pacific ex-Japan equity fund, focuses on higher-quality companies with good dividend yields.

If investors are looking for a growth-style mandate, our preferred fund is Schroder Asian Growth. This fund has a strong long-term track record with an emphasis on bottom-up securities selection and active management.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Hartmut Issel, UBS Wealth Management

Singapore

With the recent sanctions and both the US and North Korea exchanging threats, we moderately increased the probability of military action from very low (<10%) to low (10-20%). However, we still view a US military campaign against North Korea as highly unlikely.

At the same time, the global economies are expanding at pace. Asia stands out with its solid economic and corporate fundamentals, and we expect robust double-digit earnings growth both in 2017 and in 2018.

We also remain overweight global equities. Investors who position solely for a tail risk would miss out on the market’s strong  fundamentals.

Therefore, rather than recommending positions or hedges that are targeting discrete outcomes, we advise considering ideas that are based on fundamentals in their own right but may see accelerated performance if tensions around North Korea rise.

These include: long Chinese equities versus short Taiwanese equities; long Indonesian equities versus short Philippines equities; buy USD/AUD; buy USD/SGD; long gold and/or silver versus base metals.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Daryl Liew, Reyl

Singapore

We still remain positive on Asian equities despite the current heightened geopolitical risks with the threat of a military confrontation on the Korean Peninsula.

Our base case scenario is that the status quo will be maintained and there will be no war. This is because we believe South Korea is firmly against military action and that the US will not proceed with an invasion unilaterally without South Korea’s agreement.

A war also is not in North Korea’s best interests, since they recognise they will likely lose in such a scenario. Should the status quo hold, Asian markets could continue to grind higher on the back of a stronger global economy and a recovery in global trade.

This, coupled with weak inflationary and a falling US dollar, have provided Asian companies with the perfect backdrop to expand corporate earnings, which should provide the catalyst for further moves higher in equity markets.

We currently gain our Asian equity exposure through a mix of direct stock picks, in-house products, and third-party country funds such as First
State Regional China.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Florence Tan, Citi

Singapore

We remain positive on Asian equities. We note that even real episodes of geopolitical conflict have rarely led to lasting turning points in financial markets.

Excluding World War II and the Arab oil embargo, which caused a rationing of critical energy supplies, initial declines in share prices have on average taken just one month to reverse. While geopolitical tensions may cause market fluctuations, we stay focused on economic growth and earnings.

Asia’s economic growth remains robust, and we expect real GDP growth of 6.1% and 6.0% for 2017 and 2018 respectively. Given Asia’s high level of operating leverage, robust economic growth helps to lift earnings.

Earnings are forecast to grow 21% in 2017 and 10% in 2018. A stronger economy lifts asset values and improves cash flows. This lowers non-performing loans and is supportive for financials, which have a large weighting in the MSCI Asia ex Japan index.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Stephen Pau, Hefeng Family Office

Hong Kong

We are positive on Asian equities throughout the year, especially given that the US dollar index dropped below 100 in the second quarter.

We are presently seeing capital discipline (i.e. capex cuts) in Asian companies. EBIT margins and free cashflows are expected to improve over the next few years. Asian GDP growth has not been derailed, and is still forecast at around 5% for 2017 and earning growths are still strong.

Although the current situation at the Korean peninsula will increase the geopolitical risks, we doubt this will derail global economic growth.

We like First State China Growth as it adoptsan active bottom-up approach on companies with sustainable long-term earnings per share growth. In addition, the fund encourages conviction investment, is relatively benchmark insensitive and focused on absolute returns.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Jay Roberts, RBC Wealth Management

Hong Kong

Asian markets have not been affected much by the Korean issue to date.

The Korean won has been flat for months and the KOSPI is close to its all-time high, for example. There was a curiously, close correlation between the renminbi and gold over the summer, but it is unclear if this is coincidental.

Asian equities markets have shown real strength this year. Generally, the move higher has been driven by the positive alignment of global leading economic indicators.

Going forward, steady Chinese data would be supportive of Asian stocks, though the mercurial Chinese economy is always hard to fathom.

For some markets, idiosyncratic factors such as the strength in Samsung Electronics in the KOSPI or the re-rating of the Apple supply chain in Taiwan have been influential.

Japan’s TOPIX index, which has the highest concentration of manufacturing and industrial companies of any developed market, is highly leveraged to global PMIs. The strong performance of that market is as expected.

We continue to believe that the TOPIX is undervalued relative to the trajectory of corporate earnings.

We prefer Asian equity funds that have unconstrained strategies, are more concentrated and have an above average exposure to mid-cap stocks as sources of alpha.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Events
  • Citywire Asia Retreat 2016

    Citywire Asia Retreat 2016

  • Citywire Asia Retreat 2016

    Citywire Asia Retreat 2016

  • Citywire Asia Retreat 2016

    Citywire Asia Retreat 2016

  • Citywire Thailand 2016

    Citywire Thailand 2016

  • Citywire Thailand 2016

    Citywire Thailand 2016

  • Citywire Thailand 2016

    Citywire Thailand 2016

  • Citywire Hong Kong 2016

    Citywire Hong Kong 2016

  • Citywire Hong Kong 2016

    Citywire Hong Kong 2016

  • Citywire Hong Kong 2016

    Citywire Hong Kong 2016

  • Citywire Singapore 2016

    Citywire Singapore 2016

  • Citywire Singapore 2016

    Citywire Singapore 2016

  • Citywire Singapore 2016

    Citywire Singapore 2016

  • Citywire Singapore 2015

    Citywire Singapore 2015

  • Citywire Singapore 2015

    Citywire Singapore 2015

  • Citywire Hong Kong 2015

    Citywire Hong Kong 2015

  • Citywire Hong Kong 2015

    Citywire Hong Kong 2015

  • Citywire Asia 2014

    Citywire Asia 2014

  • Citywire Asia 2014

    Citywire Asia 2014