Investors upbeat on Japan, H-shares in Asia

Singapore

JAPAN and Hong Kong-listed China stocks are favoured in the second half of the year, though some analysts have turned cautious on stocks as an asset class in the short term, citing the impending US interest rate hike and Greece-related uncertainties.

Many large investors in the world nevertheless remain optimistic on the outlook for the global economy. An increasingly likely exit by Greece from the eurozone may bring contagion risks, but Europe is recovering economically and the European Central Bank (ECB) has the power to support the euro, they say.

London-based Kevin Gardiner, global investment strategist at Rothschild Wealth Management, told The Business Times over the phone on Monday: "The mood is, we're puzzled . . . We're not pretending to be able to call the precise outcome, but we do feel the system as a whole can muddle through this even if Greece leaves the single currency."

Kelvin Tay, regional chief investment officer at UBS Wealth Management, told BT in a Monday e-mail that the bank's views on Europe and Asia have not changed despite what he sees as an unfavourable result from Sunday's Greek referendum.

"Asian assets are likely to be weaker over the rest of this week, although Asia is likely to outperform the rest of the global emerging markets," he said.

Mr Tay added that structural reforms in Spain and Ireland, signs of progress in Italy, and rising eurozone bank lending and consumer spending all provide a larger cushion from shocks.

While European assets are favoured by Western-based investors, Japan and China stocks are preferred by Asia-based investors.

One of them was Singapore-based Robert Rountree, global strategist at Prudential's asset management arm Eastspring Investments. He told BT last Thursday that valuations look attractive in both Japan and China's H-Shares. Investors underestimate the corporate improvements happening in Japan, he said.

The top three holdings for Eastspring's 136 billion yen (S$1.5 billion) Japan Dynamic Fund at end-May were Mitsubishi UFJ Financial Group, carmaker Honda Motor and printer maker Ricoh.

"Any fallout from Grexit affecting Asia would be a buying opportunity. Japan looks to be the easiest one, for the second half. Next is to be selective on China . . . Within Asean, we still see value, but we're fully expecting Asean to sleep until we move through this slow patch," Mr Rountree said.

Global strategists among large private banks and asset managers also like Asia.

Michael Strobaek, chief investment officer of Credit Suisse Private Banking and Wealth Management, told BT in an interview last Wednesday that even if Greece leaves the eurozone, there was only a small probability that things would turn ugly.

He continues to be neutral on equities, though he sees opportunities in Europe, Japan and Switzerland.

"Our highest conviction view is Japan. There are very encouraging signs of structural and corporate governance reform . . . Japanese stocks are not very expensive, they are among the cheapest in the world," he said.

Sean Taylor, head of emerging market equities at Deutsche Asset and Wealth Management, said in a briefing last Tuesday that he is "strategically overweight equities but tactically neutral".

He thinks there is little downside risk in Japanese equities because of expected flows from pension funds reallocating from low-yield bonds. "We would recommend Japanese equities in the medium term, but hedged," he said, citing higher returns on equity and dividends paid by corporates.

BlackRock chief investment strategist Russ Koesterich said in a Monday note that Japan and Europe equities remain his two "overweights". Japan is favoured due to relative value and aggressive stimulus supporting corporate earnings, he said.

Rothschild's Mr Gardiner, however, is "on the fence" where Japan is concerned. "I don't know yet whether Abenomics is going to work," he said, referring Japanese Prime Minister Shinzo Abe's economic policy of massive monetary stimulus, government spending and structural reforms.

"We've seen bigger dividends posted and a number of buybacks, but we still haven't seen aggregate returns on equity improving," he said.

To Mr Gardiner, the biggest opportunity lies in Europe. Within emerging markets, he prefers China H-shares and countries exposed to the US business cycle like Taiwan and Korea.

Within the China space, institutional investors like the relatively cheaper Hong Kong-listed China stocks, or H-shares, compared to the onshore China A-share market, perceived as riskier.

Said UBS' Mr Tay: "The valuation of MSCI China is currently not demanding at 10 times 12-month-forward earnings, which is still below its long-term average even after stripping out the elevated valuations of the previous upcycle in 2007-08 . . .

"Banks and the property sector are not only the key beneficiaries of China's ongoing monetary easing cycle, but are also trading at undemanding valuations."

Eastspring's Mr Rountree likes Chinese banks, and some real estate non-investment grade bonds.

"Banks always seem to find a way to generate profits. You've got so many funding needs coming up, with the Asian Infrastructure Investment Bank, gas lines between Moscow and Beijing, railway lines between Beijing and Madrid or Berlin. It's an awful lot of infrastructure spending that's going to provide banks with a solid source of income," he said.

He said defensive stocks in Asia are expensive, with a dividend yield of 2 per cent. This excludes telcos, which yield 4 per cent. Cyclical stocks are cheap by comparison, with a yield of 3.5 per cent, he noted.

On China, Deutsche's Mr Taylor said a big collapse is not expected due to support from the government. His preferences lie in insurance companies and consumer plays on tourism, healthcare, and education. "We also look at other ways of playing China like Korean cosmetic companies and Thai tourism companies," he said.

Most institutional investors in the West have missed the China rally and are waiting for earnings there to improve, Mr Taylor said. "I expect that if foreign money does come in, it will probably initially go into large caps like the banks and telcos," he said.

However, he does not like Chinese banks. "When they're cheap you buy them but there's no great structural story. Banks will be the losers in the reform process, because they are going to be squeezed on margins. Given weakness in the economy, you've got to see non-performing loans pick up at some stage," he said.

On the A-share market, a BMI Research report on Monday warned that with authorities now trying to prop up the market with unprecedented tools, a failure to stabilise it can lead to a crisis of confidence.

Meanwhile, Singapore stocks are regarded as inexpensive, but investors are generally staying clear due to the lack of a growth catalyst.

CIMB head of equity research for Singapore, Kenneth Ng, told BT in a Monday phone interview that he likes the underlying story of the transport sector. He also sees reasonable valuations and yields in real estate investment trusts (Reits), and Singapore banks, which will benefit from gradually rising rates.

He is "underweight" the consumer and commodities sectors, which are facing a weak growth environment, as well as telcos, which he sees as expensive.

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