Investors shrug off contagion fears in Asia bid

04/05/2010 | Chris Wright and Sid Verma

Global fund managers are committing more money to Asia, shrugging off concerns that high valuations and European contagion could derail Asian asset performance

Global fund managers are committing more money to Asia, shrugging off concerns that high valuations and European contagion could derail Asian asset performance.

“Given the uncertainties about the ratings and fiscal positions of many OECD countries, there is a strong case to be made that the debt of emerging economies is an extremely attractive proposition,” Oliver Bolitho, head of Goldman Sachs Asset Management Asia, said Monday in response to a question from Emerging Markets.

Japanese private investors alone had put more than $40 billion into emerging debt, Bolitho said. “There is a very significant positive flow in the search for yield.”

Nevertheless, Asian markets sold off yesterday on news the Chinese central bank hiked bank reserve ratios on Sunday for the third time this year. Hong Kong’s Hang Seng Index slid 1.4%, South Korea’s Kospi 1.2%, Taiwan’s Taiex lost 0.7%, while India’s Sensex finished down 1%. And the Asia ex-Japan iTraxx investment-grade index for regional bonds widened by 3 basis points.

Mark Mobius, chairman of Templeton Asset Management, said investors benchmarked to Indian and Chinese stocks in JP Morgan’s benchmark Emerging Markets MSCI index would fail to deliver market-beating returns this due to tight valuations. “We prefer frontier markets in the region,” he told Emerging Markets.

Antoine von Agtmael, chairman of Emerging Markets Management, said that investors benchmarked to the MSCI would underperform developed equity markets this year.

Credit Suisse, which dumped much of its listed equity exposure to emerging Asia in November, has instead focused on what it calls an EM exposed index – developed world companies which get more than 50% of their revenues and profits from emerging markets.

But Robert Parker, senior advisor for Credit Suisse Asset Management, which manages Sfr1.3 trillion worldwide, said valuations were “starting to look more reasonable. “ He added: “After the next two to three months we will want to go back into emerging market equity.” He favours Korea and Taiwan, as IT plays, and Indonesia, though he said there valuations are looking stretched.

“We are long emerging debt,” Parker said, noting that the asset manager’s move out of G3 sovereign debt to emerging markets dated from the fourth quarter of 2008 and remained firmly in place.

But Parker also said that despite his positive view, he was “disappointed that [emerging] corporate bond markets have not developed satisfactorily,” though he hoped capital flows would act as a catalyst.

Managers seem less worried about capital flows and bubbles in the debt markets. “Clearly there are long term concerns if the money is hot,” said Bolitho.

But, with markets like Japan likely to keep rates extremely low in the near term, and Brazil expected to raise its own rates by as much as 3.75%, “that’s going to create an additional cushion for those investors who are already in the market to protect their investment in the event there is some short term volatility in exchange rates.”

“The momentum of that trade is likely to remain strong not just in the short term,” Bolitho added. “This is a long term trend.”

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