Han Ong, Salomon Smith Barney’s Asia strategist, is advising fund management clients to dive into Asian stocks across the board in expectation of a boom fuelled by US interest rate cuts. And the reason to go out on a limb? He has concluded that a buy and hold, strategy, the paradigm of sensible long-term investment, just doesn’t work in this part of the world. So you might as well flit between sectors and cycles.
Ong has crunched stock earnings-per-share (EPS) numbers for the past seven years and found that the average Asian company has badly compensated shareholders and providing no EPS growth right across from Hong Kong to Taiwan and Korea to Singapore. Ong suspects that earnings dilution and poor returns on equity are to blame. Behind this is the even greater issue of bad corporate governance. “Over the past seven years, most Asian companies haven’t grown,” he comments. “Investors holding their stock are worse off than if they had held bonds or bank deposits.”
Take that, index fund managers!
Now, back to loose money policies at the Federal Reserve. The surprise cuts in January prompted portfolio managers, heavy on cash, to quickly jump back into the market, particularly in stocks they had abandoned such as tech names in Korea and Taiwan. Now these funds are fully invested, but Ong sees a new source of liquidity looming. Fed interest rate cuts pump money into the economy faster than real businesses can absorb it, in the hope that easy money spurs consumption. Ong says this hoped-for result isn’t happening, which means the money will go ito inflatable financial assets.
He looks at, for example, the rapid cuts made in the wake of the 1998 Long-Term Capital Management bailout, which fuelled the 1999 rally; or the Japanese bubble following loose money from the Bank of Japan from 1984-87. Ong believes that more Fed cuts aren’t sufficiently priced into the market, and that they will prompt an equities boom. It will be brief but heady, and he thinks the smart fund manager should be loading up on Asian equities now.
But what to do when the bust inevitably comes? Asia is a dangerous place. 40% of Asia ex-Japan’s market capitalization is in interest rate-sensitive financial stocks, and another 40% is in cyclicals such as tech. That doesn’t leave much to hide behind in a downturn.
Enter Australia, which Ong believes has been unfairly ignored. It is a little boring, he concedes, but reliable, like an old friend.
Mark Fulton, managing director and head of research in Sydney, explains that Australia plays a crucial role for fund managers who decide to ditch the buy-and-hold strategy in favour of riding trends. During times when Asia is poised for action, or during its spectacular upturns, Australia is rather, um, dull. Right now, Solly has a mild underweight on Oz. But when things get out of hand, Australia begins to look downright sexy. Those banks are growth stocks – slow, but steady. The media giants such as News Corp. and the resource companies provide diversification plus liquidity not found in the rest of the region.
Ong believes many Asia-based fund managers, whether regional specialists or spokes of a global portfolio, ignore Australia. He thinks they do so at their peril, because it offers the necessary refuge allowing investors to play a more active equities game. Perhaps if corporate governance and return on equity become bigger priorities for Asian listed companies, buy and hold will make sense, sidelining Australia’s protective role. But Ong says that day has yet to come.
