No bottom yet on economy, says Fullerton

IN the office of Fullerton Fund Management chief executive Manraj Sekhon sits a drawing of an orang utan looking somewhat wistfully at the viewer, with the scrawled words, in childish writing: "It could all be so simple".

"It is always the case for investors in general that we complicate it for ourselves," said Mr Sekhon, who is also Fullerton chief investment officer.

Where the global economy is concerned, however, there are few simple answers. Mr Sekhon foresees a difficult environment ahead despite a recent market recovery.

"From a fundamental point of view, the economic picture, the visibility for a lot of companies ... is on balance still getting worse. It's not improving," he told The Business Times.

Analysts are still downgrading their forecasts for company earnings in Singapore and across Asia, he said.

"Until we see, from a broad macro perspective, stability in earnings forecasts and a bottoming in the downgrade and earnings cycle, it's probably sensible still to be cautious. It doesn't mean there aren't bottom-up opportunities out there, but from an overall market point of view, you need to cautious."

To do well, investors have to understand what their investment philosophy and approach is and stick to it, Mr Sekhon said.

Fullerton's own approach is fundamental and research-based, he said.

The fund house has added equity positions in a couple of Chinese companies in the last two months. One is a consumer discretionary firm, and another is a "technology, Internet, partly e-commerce" firm, he said, declining to give more details.

"We always look for the same thing: good businesses, strong fundamentals, with the potential to sustainably grow earnings in excess of the market over the medium to longer term."

Fullerton, which focuses on Asia, used to be the internal fund management unit of government investment firm Temasek Holdings before being spun out in 2003.

Today, the wholly-owned subsidiary of Temasek has grown its assets under management by end-2015 to S$13 billion, a new high from under S$10 billion a few years ago. It hires more than 100 people globally, 40 of whom are investment professionals.

About two-fifths of assets under management (AUM) are in equities, another two-fifths in bonds, and the remaining fifth split between multi-asset funds and fund-of-funds products.

The past year has been rough for many fund houses, with many equity funds in the red at end-February compared to a year ago. Fullerton was also not spared.

Nevertheless, its equity and bond funds have finished in their top quartile over calendar year 2015 as well as over longer periods, Mr Sekhon said.

Growth in multi-asset, fixed income

Looking ahead, AUM growth will come first from the multi-asset and fixed income segments, he said. Multi-asset refers to funds that do not focus on a single market or asset class but diversify broadly across asset classes like equities, bonds and property.

Fullerton on March 17 had appointed former Lombard Odier Asia chief investment officer Pranay Gupta as its new head of multi-asset strategies.

"We believe clients are going to require even more sophisticated solutions not just here but outside Singapore," Mr Sekhon said.

Institutions have been looking for absolute return solutions, rather than investing in a sector and benchmarking the fund manager against the performance of the sector - which can lead to negative returns in a bad year for the particular sector like emerging markets.

"In Singapore, statutory boards, charities, ministries, corporates, different people have different requirements ... saying I want five, six, three per cent year in, year out, this is the amount of risk I'm willing to take, I'm comfortable in allowing you to go so far in my mix of instruments," Mr Sekhon said.

As for fixed income, "we still see interest in Singapore dollar strategies, we're seeing interest in hard currency bond strategies. So we're seeing growth there".

Fullerton has added, among others, bonds in China real estate, he said. In equities, the trend is for clients to look for stocks with growth potential as well as dividend yields. China-related strategies are also drawing interest. "We will see more institutions around the world wanting to allocate to renminbi assets over time," he said.

Fullerton has been increasing China and Asean equities exposure while reducing India exposure. India has done well relative to Asia in the last two years. But there are clear signs of a slowdown based on company visits there, Mr Sekhon said. Banks are starting to see bad loans increasing, consumer spending is coming down, and the industrial sector is slowing.

"The working capital cycle for a lot of companies is stretched out, access to liquidity is getting more difficult, demand is slowing, the government has been slow on the reform agenda."

Asked about the Singapore stock market, Mr Sekhon said Fullerton has very little invested here. "I wouldn't say there are a huge number of interesting growth ideas," he said.

While some sectors - say oil services, real estate and banking - have seen interesting growth in the past, that is not necessarily the case now.

And Singapore's stock market correction from a year ago is not enough to tempt the fund house. "Valuation is one part of it, visibility is another," he said, citing the uncertainty over capital expenditure in the oil services space.

No economic recovery yet

Uncertainty is a word that is repeated more and more by the US Fed, Mr Sekhon said.

"It is fair to say that central bankers are as uncertain as they've ever been about the growth outlook ... they're finding their job particularly tough right now."

Business cycles have become shorter, and market cycles along with them. Uncertainty is fuelled by low demand and investment appetite. At the same time, China is slowing down, and Europe is dealing with debt and deflation, he said.

"It's going to be at least another 24-36 months on the economic side before we can see meaningful recovery," he said.

In Asia, too, Mr Sekhon thinks the economic bottom is yet to be reached. "That's the message we're getting from a lot of corporates we speak to."

Industrial and manufacturing businesses in China have seen further deceleration in the last six months. And while on price-to-book terms Asia is trading at low valuations, Mr Sekhon said it is not clear that stocks have bottomed once energy and resources counters - which have tanked - are excluded.

On the other hand, the market being a forward-looking mechanism, it is also possible that in market terms, a bottom has been reached, he mused.

Nevertheless, Mr Sekhon still sees opportunities in Asia with valuations, expectations, and investor interest at record lows.

Opportunities can be found in China, India, Indonesia, Thailand, in sectors like consumer, technology, environmental services, green technology, autos, homebuilding construction and property, he said.

"History has shown that it's at times like this that you really need to consider taking a view. Maybe not across the board, but to find things that are attractive."