Monday, July 27, 2009

Foreign Funds Flow

Suddenly foreign media is picking up on a surge in the flow of funds into Asian markets. Any truth in that?

Foreign fund managers are banking heavily on an Asian earnings upturn and continual growth in China to drive market momentum forward. Following a lull, a sudden leap on Wall Street has boosted foreign investor interest in Asian markets. The psychology of the markets has changed from the fear of losing money to a fear of losing opportunities.

According to EPFR Global fund research, US$137.5 billion flowed out of money market funds and almost a fifth went into Asian and other emerging market funds in the second quarter. The trend has continued in recent weeks, although the size of inflows is subsiding. MSCI Asia ex-Japan rose by 34 per cent year-to- date to July 24 and emerging by 46 per cent in US dollars, but lower gains in euro and sterling. Credit Suisse said there are several positive fundamental factors which support foreign investment in Asia.

Asia is expected to lead the global recovery due to its low leverage and financial flexibility to pump-prime economies. Second, China and India are growth engines. Third, emerging Asia is projected to deliver an average earnings recovery of 33 per cent in 2010, according to the Institutional Brokers Estimate System. Finally, company directors are signaling earnings upgrades.

Recovery leaders include companies which benefit from the massive fiscal stimulus packages in China and selected Asian countries, and technology companies with the largest potential earnings rebound. Credit Suisse advises that the collapse in Asian and global trade was a function of falling final demand and liquidation of bloated inventories.

The Asian stockmarket boom has been a boon to fund managers who had a dreadful time between 2007 and spring of 2009. Over twelve months, MSCI ex-Japan is still down 26 per cent in US dollars. Thus, the 2009 rebound has only profited investors who entered the market this year and reduced the pain of others.

Jason McCay and Richard Evans who manage the Martin Currie Asia Fund, a hedge fund, are focusing on companies that concentrate on the domestic markets. They increased exposure to Chinese banks and have purchased residential Chinese developer Guangzhou R&F Properties. Bullish on coal, they have bought Bumi Resources in Indonesia and have also invested in the Indian property sector through Unitech. They are concerned, however that the market surge has been caused by a surplus of liquidity. 'Valuations are no longer cheap and many companies are already pricing in a meaningful recovery in profits.'

Aberdeen Asia Pacific Fund contends that equities 'appear to have run ahead of earnings and economic fundamentals and a pullback would be healthy.' Longer-term, Asia's sounder economic fundamentals will enable it to bounce back more strongly than the West'. Top stocks include OCBC, Jardine Strategic Holding, Samsung Electronics, China Mobile and Singapore Telecommunications and Singapore Technologies.

Andrew Beal, fund manager of Henderson Asia Pacific Capital Growth, notes that aggressive government policies, loose monetary conditions and a steady improvement in economic activity have all helped to drive markets higher since March. Taking a long-term view, he says there is growing awareness among Asian governments over-reliance on exports to the West has become a structural weakness. It needs to be addressed by stimulating domestic consumption.


I do think stock prices have run a bit ahead of fundamentals. I do think the worst of the global crisis is behind us, although I do think Central & Eastern Europe still has some ways to go. Why are markets so inherently bullish now? You still get the majority of "experts" claiming that things are a bit too much, and yet they still keep running. Not just in Asia but look at the US equity markets in recent weeks.

I believe the answer lies in the massive liquidity on the sidelines. The massive liquidity stem from the government printing presses and various fiscal stimulus programs. Now that risk aversion has subsided somewhat, now that the bigger US banks seem to be on better footing, investors are more willing to place their bets ... no more bloody T-bills.

Naturally in such a situation liquidity would seek out the most liquid of assets. While bashed down property prices in the US might look attractive, its liquidity and gestation period may require a bit more patience. Most investors probably think its a better whack to trade the markets than to buy a depressed property now as you might have some time to wait out the property cycle. Even though many might be getting a bargain in the US property markets, getting a decent rental is another thing, getting a paying tenant that won't turn into a non-paying tenant quickly is another problem. All said, equity seems to be the only channel for these funds to trickle in.

In Malaysia, do not be fooled by the huge surge in the new index since launching because the index is very very skewed. Take the top 10 stocks and see their performance over the last 2 weeks and you will know what I mean. There has been a strategy to make the new index "look good", yes... there might have been some rebalancing by indexed funds as well ... but ... So, local equity market has not been as bullish as the new index would want you to be thinking. Its a rotational market, not entirely convincing... just look at weekly turnover value week by week for the last 6 weeks, you will find a distinctive trend... and you should be able to draw your own conclusions.

p/s photos: Fiona Xie

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