“Not having Asian investments in their portfolio could become a medium- to long-term impediment to savings growth for Australian investors,” Mr Bryant said. 

“Many investors are too complacent about this shortfall, misleading themselves that their portfolio structure and overall investment strategy make up for any lack of Asian investment. 

“They have simply accepted a number of myths about investing in Asia – such as if they are invested in Australian companies, or if they have an international component in their portfolio through US or European equities, then they have exposure to Asia as these are major trading partners of the region. 

“Acceptance of such myths betray a lack of understanding verging on complacency that, if not addressed, could prove costly to their portfolios.” 

Mr Bryant said that while it is generally accepted that this is the Asian century for trade and power, investors haven’t accepted the sense of investing in the region to participate in its inevitable growth. 

“It makes particular sense for Australians to invest in the region because of our growing relationship with Asian countries,” he said. 

“Australia’s four biggest export markets are China, Japan, South Korea and India which, when combined, account for over 53 percent of our exports. Yet only 8.5 percent of our total international investments go to the region [1]. 

“On the other hand, our traditional trading partners, the US and UK, the powerhouses of the nineteenth and twentieth centuries, now only take 9.5 percent of our exports, yet account for 51 percent of our investments [2]. 

“This indicates a blinkered approach that does not recognise time has moved on,” Mr Bryant said. 

He said that he had also heard anecdotal evidence from investors showing that they simply don’t understand the investment realities of Asia. 

“For example, investors seem to think that markets in Asia are less secure than in developed countries because of corruption and weak regulation. 

“In believing this they are overlooking the scandals in Wall Street, London and other western financial and economic centres – including Australia with Storm Financial, Trio and the Australian Wheat Board (AWB) among others. 

“While Asian governance varies enormously country by country, main investment centres such as Japan, Singapore, Hong Kong and Korea, are highly efficient and transparent. 

“Nor do we recognise and give credit to the strength of Asian economies – today Asian central banks collectively hold about half the world’s foreign exchange reserves [3]. 

“Virtually all forecasts and predictions suggest Asia will continue to grow dramatically and, by the middle of this century, experts believe it will account for over half of all global trade. 

“Such evidence means that it simply doesn’t make sense for Australians not to be investing in a region with such strong attributes and outlook,” Mr Bryant said.

[1]   Emerging markets to account for 80% of future global growth: ex-IMF chief, English.news.cn, June 2011

[2]   HSBC survey (Nov 2011)

[3]   ‘Why Invest in Asian Credit?’ PIMCO, May 2012 

The post Australians at risk of underinvestment in Asia appeared first on AdviserVoice.

TRG has acquired a 20% equity stake in Octis with an option to increase that by a further 10% if hurdles linked to new funds flow are satisfied. Funding of the acquisition was from working capital and the strike price of the option is correlated to the prevailing net asset backing at the time the options are exercised. The initial acquisition price for the 20% stake was approximately $224,000.

Founded in 2007, Octis is an Asian multi strategy equity manager based in Singapore. The investment team, headed by CEO Jerome Ferracci who has 27 years of experience, has achieved an outstanding track record with +22% net returns since inception against – 21% for the MSCI Asia Pacific index (as at 31/05/2012).

“We have been interested in diversifying into alternatives and have been actively searching for opportunities. We are very pleased about partnering with a quality business that offers access to Asia with low volatility. We look forward to assisting in the growth of Octis both in Australia and overseas,” said Andrew McGill, Treasury Group Chief Executive Officer.

“We have been very impressed by TRG’s performance in partnering boutique fund managers, and are very confident of the synergies created with our partnership. On one hand TRG has a proven outstanding track record in terms of product development and distribution, whilst on the other hand we strongly believe in our capability of bringing significant value to investors by mastering equity risk at a low level of volatility through our alternative investment products,” said Jerome Ferracci.

11 July 2012 

The post Treasury Group Limited adds an Asian Alternative Specialist appeared first on AdviserVoice.

“We think it will,” says David Urquhart, Portfolio Manager for the Fidelity Asia Fund. “The Organization for Economic Co-operation (OECD) forecasts the Asian region to grow around 7% in 2012 and 5.6% for South East Asian economies. That’s below the 8.5% forecast for China, but above the 4% projection for Australia.

“Although Asia is not immune to a slowdown in the West, growth rates in Asia are also slowing, but it’s proving more resilient to a global economic downturn than in the past. One reason is that the region is significantly less reliant on the West than previously. For example, today it’s less reliant on the West as a market for its exports, with over half of Asia’s exports now being traded within the region.”

Mr Urquhart says one reason he is optimistic about Asian equities is that the region’s demographics continue to be very favourable for investors.  The labour force is forecast to grow at 1.5% a year for the next 10 years, compared to Europe and the US which are growing at just 0.3%.

“The region’s steadily rising labour force will provide a source of higher growth. As people enter the labour market they become economically productive, rather than being a drain on an economy. More people will be able to earn and therefore spend, buying goods and services that companies provide.

“The rising labour force is also adding to the growing middle class in Asia, which is expected to almost double to over a billion people in the next five years. China is expected to report the biggest absolute increase, while India and Indonesia will have stronger percentage growth.”

Another positive for the region is that while most Western economies have a negative current account balance, most Asian nations have a positive one (with the notable exception of India).

“This provides another reason for optimism about Asia, as the West slows, is that policymakers in the region still have more growth-supportive options at their disposal than their developed market peers,” says Mr Urquhart.

“Asian economies still have the ability to use both monetary and fiscal policy to help stimulate domestic demand, while in the West high levels of government debt have made Fiscal policy tools unavailable. Most Asian central banks have been tightening their monetary policies in the past few quarters so they now have flexibility to relax interest rates and credit policy in case of a severe economic slowdown outside their borders.

“It is similar, with foreign exchange (FX) reserves. Asia accounts for 63% of global FX reserves, with China accounting for half of these at the end of 2010. “Asia still has the capacity to lend and borrow. This will help corporates in the region.

“Corporate debt levels are the lowest they have been since 1981 at 25.8% debt/equity. They have been building increasingly large reserves of cash and significantly de-leveraging their balance sheets following the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008. Strong balance sheets, cash flow and rates of return have put Asian companies in great shape. Though some companies will do better than others in this kind of environment.”

Mr Urquhart points out that “there are several other factors that will further contribute to Asia’s growth next year – and beyond – including increasing participation rates in tertiary education, rising labour skills, increasing urbanisation, developing credit markets and so on.  All these should further underpin the growth opportunities of companies and their share prices in the region.

“Overall, Asia’s healthy financial system, robust domestic demand, low debt levels, high savings rates and the emergence of China as an anchor of growth for the region will continue to be supportive of multi-year growth in the region.

“This is one region why the Asia (ex-Japan) region has already tripled its representation in the MSCI World All Country Index from 3% in 2003 to 9.9% by mid 2011.

“By being in better economic shape we expect Asian equity markets – which are currently following the lead of US markets – have greater upside when global markets do improve.”

What countries will provide the best market returns?
“I have returned to a slight overweight to China, as the government in Beijing should start to loosen monetary and fiscal policy there as inflation concerns reduce and growth slows in response to the slowing global economy. This should help the growth of local companies.

“I also like Indonesia and Thailand, as we have identified some great businesses there with great growth potential.

“This is key, as while the region as a whole is one of the strongest in the world it is important to identify, from the bottom-up, those companies that are going to deliver earnings per share growth stronger than the market anticipates and currently at very attractive valuations. These stocks should perform well over the next few years even in the challenging macro environment.”

Source: All figures from CLSA Why Invest in Asia November 2011.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

The post What’s the outlook for Asian equities? appeared first on AdviserVoice.

Mr Ford says Asia will emerge stronger from the current financial storm – at least relative to the developed world – as there is a heavy price to pay for all the bail outs, recapitalisations and fiscal stimuli that have taken place in the developed world.

Cash-rich companies in Asia, ex-Japan are sitting on around $US1 trillion in cash and are also looking to deploy these funds by finding quality merger and acquisition targets with attractive valuations.

Strong balance sheets and a reduction in capital expenditure are also behind the build-up of corporate cash reserves, he said. “People don’t tend to associate income with Asia, but we are seeing a growing trend of Asian corporates undertaking share buybacks, special dividend payments and even M&A activity,” Mr Ford said.

He said the dividend income growth story would continue for some time and that dividend payouts were not associated just with infrastructure stocks. “We are seeing airlines, heavy industrials, and Taiwanese technology, media and telecommunications companies paying healthy dividends, as well as what you would expect from typical defensive stocks such as banks.”

In contrast to the West, Asia is in good fiscal shape on the sovereign, household and corporate front. According to the International Monetary Fund, the G20 advanced economies had a debt-to-GDP ratio of more than 100% in 2010. This figure is projected to rise to 125% by 2015. 
However, public debt levels are around one-third of GDP in Asia ex-Japan and are projected to decline to less than one-fifth by 2015. 

On consumer spending, Asian households can afford to spend more given the very low levels of household debt. 

Demographic factors and high savings rates will come down over time as the Asian population becomes increasingly middle class. This means that spending will accelerate in the future, translating into structurally higher levels of economic growth, particularly relative to those of developed world economies where households are necessarily focused on debt repayment.   

On the corporate front, Asian companies with healthy balance sheets are in a strong position to weather the current market volatility and reward shareholders with higher dividend payments and share buybacks.  The cash-payout ratios are set to increase further from 12% in 1998 to a prospective average of 32% estimated for 2011-12.

“This is significant because it shows us how strong corporate balance sheets are and how strong profits and cashflow are in Asian companies. It also shows a marked change in attitudes to good corporate governance and concern for shareholders’ interests,” Mr Ford said.

“This focus on shareholder value – coupled with robust balance sheets and healthy profits – means that over time an increasing proportion of total return from investing in Asian equities will come from dividend income and share buybacks rather than purely capital gain. In an environment so full of uncertainty, the well-covered yields in Asia are likely to become increasingly valued by investors,” he added. 

These are long-term strategies and a reflection of Asian companies getting more sophisticated and wanting to provide more value to shareholders.

Despite the current market turmoil, Mr Ford said Asia was the key winner out of the situation. “Companies in Asia remain healthy. The fundamentals are in good shape and foreign investors will once again look to this part of the world for growth and further income.”

“The bull case for Asia is not just about growth – it is about better governance, better balance sheets, better profits and cashflows, and therefore, attractive yields. Yet, Asian valuations have often remained at a discount to developed markets despite all of this,” Mr Ford said.

The post Investment case for Asia not just about growth appeared first on AdviserVoice.

Australians investing in Asia are no longer just tapping the capital growth of Asian stocks, they’re also increasingly receiving significant share income through rising dividend payouts, notes fund manager Fidelity. 

“We’re seeing more companies in Asia paying more dividends,” points out David Urquhart, Portfolio Manager of the Fidelity Asia Fund. 

Mr Urquhart says “the combination of strong balance sheets and improving return on equity has seen Asian companies’ willingness and ability to pay dividends increase strongly over the past decade. 

“The increased willingness to pay dividends is the result of management’s improved understanding that shareholders like to see a regular cash return on their investment, particularly from companies whose balance sheets are strong and that can comfortably fund their future capital expenditure to grow the business. Management also increasingly recognises that dividends provide a competitive advantage to attract investors, compared to companies that don’t pay dividends or lower payouts.    

“The ability to pay dividends is due to improved profitability. Most Asian companies are in a much better position to pay dividends, due to stronger profitability, today compared to a decade ago. Having paid down debt from the relatively high levels seen during the ’90s, Asian companies are now better able to return some money to shareholders via dividends,” (as opposed to having a larger portion of pre-tax profits going to banks in the form of interest payments). 

As to what countries, sectors and companies are paying better dividends, Mr Urquhart noted “typically the slower growth companies have the higher dividend payout ratios in each market. Telcos and utilities tend to have the highest payout as a percentage of earnings and also have the highest dividend yields. 

“There are a number of companies in Taiwan with dividend yields of around 8% as their business are generating strong cash, and they have no large capacity expansion plans over the next few years.   

“In contrast, the region’s faster growing companies typically want to reinvest a reasonable proportion of their profits to expand their businesses and so have lower dividends if at all. For retail companies this can be adding new stores, or for manufacturers it could be investing in expanding capacity and perhaps investment in research and development. For these companies with strong growth opportunities, it is expected that the returns to shareholders would largely come from capital gains and that dividends would grow more or less in-line with the growth in earnings they achieve.”

The Sydney-based Mr Urquhart notes there is still some way to go in terms of the region’s dividend growth. “The average dividend yield for companies in the Asia region is currently about 2.5%. This compares to around 4% for Australian companies.” 

Dividend yields vary country by country and are quite diverse, he added, noting the Taiwanese market delivers an average dividend yield of 3% compared to India with an average yield of 1.1%. 

Mr Urquhart noted “a key point of focus for investors is not necessarily what the dividend yield is today, but how quickly dividends can grow. Many investors focus on earnings growth, trends in profitability and ability of companies to generate of free cash flow as indicators of future dividend paying ability.”

The post More Asian companies paying more dividends appeared first on AdviserVoice.

“Asian markets are attractively priced following the recent market correction,” said David Urquhart, Portfolio Manager of the Fidelity Asia Fund. “The region is now trading at a forward price to earnings ration (P/E) of 10.5x, which is at a deep discount to the five year average of around 13x. This is more than one standard deviation away from the five year average and is the second cheapest that you could buy Asian markets in a decade.

“Asian corporate balance sheets continue to be in very healthy shape, and economic growth continues in Asia. On a Price to Book basis the current valuations are 1.8x book value, versus five year average of 2.1x and with the return on equity much higher than that of 10 years ago.

“So, from a valuation standpoint, this is the second best time to be buying Asian stocks in 10 years. There are risks in the US and Europe but these risks are more than priced in at the moment. I am still comfortable with the growth outlook in Asia, which should significantly outpace the rest of the world in the coming years.”

Mr Urquhart said there are also some positives for Asia that arise from slower global growth. Many Asian economies – including China, Singapore, Korea Taiwan and India – introduced policy tightening measures due to their strong growth. “Slower global growth and the resultant lower commodity prices, especially oil prices with Asia being a big energy importer, will help to reduce some of the inflationary pressures in Asian economies. This will provide policy makers a reprieve on what was expected to be further tightening measures.

As a result, “I have recently moved China from underweight to a small overweight. Currently, China is trading at a forward P/E of 9.5x, which is at a significant discount to its 5-year average of 13.5x. I am definitely seeing more attractive buying ideas in China.”

He added that “in an environment of slowing global growth, the focus has shifted away from growth opportunities – where risks of disappointment are increasing, and more on the value opportunities that exist in the market. Typically when you see the P/E of a stock that is the same as the sustainable dividend yield you are getting a great buying opportunity. This is especially so when these companies still have good prospects for growth. Recently there have been an increasing number of attractive opportunities that have emerged.”

As for the impact of the slowing US economy on the region, Mr Urquhart said “S&P’s recent downgrade of the US Treasury debt from AAA to AA+ is a psychological blow to the American pride, but the economic consequences are minimal. When we see companies downgraded a notch from AAA, there is no material impact on the cost of funds or availability of funding. The market reaction – US bonds actually rallying – is consistent with this view. Rather, it highlights that the main concern of the market is about weaker than expected US growth in Q2, the apparently more difficult policy response environment – delays in getting the debt ceiling lifted – and so the market is placing a higher probability of recession in the US.

As for the prospect of a double dip recession in the US, Mr Urquhart said “We have just seen of US listed companies report Q2 results, and with 83% of them having reported, earnings are on average 5% better than expected. Clearly corporate America continues to be in good health and this is also being reflected strong hiring by the private sector. Unfortunately the government (local and federal) are going through austerity measures to reduce debt and this is seeing some dismissals and so the overall unemployment remains more subdued. Despite the slower growth expectations, I don’t foresee a double-dip scenario in the US. Q2 growth in the US was impacted by the supply chain disruption caused by Japan’s tsunami, especially for the auto industry, and by higher oil prices. US growth is expected to slow to less than 2% for 2011 and 2012, rather than 2.5 – 3% that the market has previously projected. However, as we move into Q3 and Q4 the auto industry’s supply chain disruption should begin to unwind.”

The post Is it time for Asian equities? appeared first on AdviserVoice.