Developed Asia’s equity valuations currently offer more upside than ASEAN stocks, according to Schroders’ Lee King Fuei.
‘At the start of the year, we were much more tilted towards ASEAN markets because the region’s structural trend stories were playing out strongly in these markets,’ Citywire A-rated Lee, who co-manages the Schroders ISF Asian Total Return fund with Citywire AA-rated Robin Parbrook, told Citywire Asia.
‘Valuations were also cheap because these markets were relatively unloved back then,’ he said.
Now, however, stock valuations have reached their fair values and the fund has been incrementally locking in profits, Lee said.
‘We think the better opportunities today lie in developed Asia markets, such as Hong Kong, Singapore and Australia,’ he pointed out.
Lee, who also runs the Schroder ISF Asian Equity Yield fund and is head of Asian equities, Singapore, said that over the past few months he has been reducing exposure to countries such as the Philippines and Indonesia.
India, a star equity market performer in the first half of 2014, also holds little appeal for Fuei.
‘India has one of the lowest number of stocks that offer upside to fair value at this point in time,’ he said.
At the end of June, the Asia Total Return Fund had 32.6% of its portfolio invested in Hong Kong stocks, 12.6% in Australia and 9.7% in Taiwan.
Bullish about developed Asia, not APAC
Nevertheless, Lee remains bearish on the prospects of the region's equity markets over the next 12 months.
One reason for that is pessimism on global growth prospects, especially in developed economies, where Lee sees slower growth than expected.
Since exports to developed markets account for a large share of GDP for many Asian economies, Asian economic prospects are likely to be affected as well, he said.
‘I believe the global recovery will be slower because developed markets have not yet set the base for sustainable growth,’ he pointed out, adding that the de-leveraging underway in developed economies has only managed to shift debt levels from one part of the economy (private sector) to another (public sector).
Even on a technical level, Lee said his team’s research indicated that less than half of the region's stocks boast compelling valuations.
The cautious outlook for Asian equities has prompted Lee to lower the fund's net long position to 70%.
However, he pointed out that he remains positive about Asia in the long term, given the ongoing structural drivers of urbanisation, industrialisation and positive demographics.
‘Sometimes, people lose focus of these drivers when they lose focus on cyclical factors,' he said.
‘But eventually the long term drivers play out. Those who are long-term investors should see the current weakness in markets as an opportunity to buy into Asian markets.’
Over the past three years the Schroder ISF Asian Equity Yield fund has returned 21.89% while the MSCI AC Asia Pacific ex Japan benchmark has risen 13.02% in USD terms.