Asia-specific equity funds should become a permanent part of portfolios, rather than the tactical play they have traditionally been, according to ING Investment Management’s regional head of equities, Nicholas Toovey.
“Asian funds have been seen as an investment you get in and out of,” Toovey said, in a month where AMP and Macquarie have launched new equity products covering the region.
“But Asia Pacific performance is ahead of the rest of the world and that is why we are overweight stocks from there in our funds.”
INGIM currently has $US76 billion funds under management in the Asia Pacific region.
The country size ranking for the region, based on the MSCI index, is Korea first, then Taiwan, followed by Hong Kong and China in fourth place.
Toovey said China would not remain in fourth place forever, and that would be a significant driver for the region.
“The whole region is looking at strong growth and we are forecasting 6 per cent per annum,” he said.
“China is forecast to grow at 8 per cent and the world at 4 per cent a year, but the Asia Pacific region will slow.”
Toovey says it is unlikely there will be another “Asia Crisis” like the one in 1997 as the economies and the ways of doing business in the region have changed since then.
“The US has a current account deficit, Europe is just about positive and Asia has a 2.8 per cent surplus,” he said.
“In 1997 most Asian rates were floating but now there is a mixture of exchange rates that ranges from informally fixed to formally fixed [to the US dollar].”
Another change since 1997 is that Asian economies are no longer completely dependent on exporting from the region, Toovey said. There is now considerable trade between the host nations as their domestic economies grow.
“This makes their economies more resilient and as they develop, more companies will float and that means increased profits, which contributes to expanding financial markets,” Toovey said.
The risks, however, range from the Chinese banking system to the tensions between China and Taiwan.
Toovey said the Chinese authorities are trying to clean up the major banks in anticipation of floating them.
The government had recently pumped $US45 billion into two banks to improve their financial stability, he said, and there is also now a banking regulator.
“But no banking system is bullet proof,” he said, “and commercial law has yet to be tested in China.”
Toovey said Taiwan was another risk, but despite the rhetoric flowing from both sides, he believed nothing major would happen before the 2008 Beijing Olympics.
“Both sides would have a lot to lose if it came to a fight,” he said.
“With China on the world stage in 2008, they are going to show the world what a model country they are so nothing is going to happen to spoil that image.”
For investors in Australian stocks, the Asian-led commodities boom would continue in the medium term, although Toovey predicted it would slow at some point.
Toovey said the relationship between China and Australia was useful to both parties.
“China wants resources and has become a major manufacturer. Australia needs to export commodities but is a major importer of manufactured goods,” he said.
“China can go elsewhere for its commodities but has no need, so Australia is in an excellent position as an exporter.”
