Few fund managers know Asia like Hugh Young from Aberdeen Asset Management. One of the most experienced and respected fund managers in the region, he has managed Asian equity funds for Aberdeen since 1985. He also co-founded the Asian operations of Aberdeen which now employs more than 170 people with 25 investment managers stationed across the region.
Mr Young answers your questions below.
Is it correct to assume that smaller funds are better placed to take positions in stocks without altering share prices in less liquid markets? Are your funds at a disadvantage to more nimble competitors?
E Cadwallader, London, UK
Hugh Young: Yes, smaller funds are able to trade better than large ones and not disturb the price. Were we to have a trading approach to markets, I would definitely agree that we would be at a disadvantage .
We do however have a long term approach and for our core portfolios would change fewer than 10 holdings a year. Most of our activity is topslicing or topping up existing holdings and portfolio turnover is very low by industry standards. The size of funds affords us better resources (we have nearly 200 people in the region) and the size of our holdings at times has attracted a premium bid.
Do you believe the Indian equity market is overvalued at this point? What is an attractive level for re-entry?
Manzur Mahmood, Manama, Bahrain
Hugh Young: Yes, India has run ahead and at the very least should pause for breath. The quality of companies is however high and the changes are real so it is hard to be precise over levels to buy/sell the market. We took some money out earlier in the year but it remains a substantial part of our Asian funds at c. 13 per cent.
What makes Singapore the better choice for you over Hong Kong? Who are the main players in South-East Asia investing who take a fundamentals approach and how do you differ?
Henry Brooks, Milan, Italy
Hugh Young: If this refers to why we chose to locate our operations in Singapore the reasons were multiple. Singapore closely reflects our own investment horizons - namely steady, long-term and careful whilst Hong Kong is “noisier” and more trading-oriented. At the time we moved here the airport was also comfortably ahead of Hong Kong’s and I would argue still beats Hong Kong’s new airport by a whisker.
As for investment opportunities they both have regional attractions, with Hong Kong being far more focused on China’s growth and Singapore on ASEAN and increasingly the subcontinent.
As far as the main players are concerned, most of the household names of asset management are present in Asia. Where we think we differ is on the longevity, stability and experience of our team and our depth/strength of process.
We only invest in companies we have thoroughly researched, visited and documented, having held many of our investments for over 10 years. We do not buy companies just because they’re in the index.
The US and China live in a close but potentially fatal economic relationship. China finances US overspending and the US is the main customer of China’s export dependent economy. In view of the senior dialogue established in September between both states, do you think of it will solve issues such as the problem of property rights and the undervalued renminbi? What will happen if one of both actors changes its strategy?
Christoph Steitz, Cardiff, Wales
Hugh Young: There is plenty of scope for “dissonance” between the US and China but I don’t think the relationship is fatal. I suspect it is one of ultimately pragmatic mutual interdependence as China follows the capitalist path, albeit in dirigiste fashion. Controls on the renminbi have already relaxed and one forgets how much China has mutated into a market economy in such a short space of time.
Admittedly China still has a long way to go and can always be thrown off track by unforeseen events but unstoppable changes have taken place. The problem for us is a more practical one: how do we profitably invest in China?
How can Chinese domestic consumption names justify such high valuations given such awful corporate governance and limited earnings visibility?
Anthony Linehan, London, UK
Hugh Young: A simple answer is that in many cases the valuations cannot be justified. We currently do not own any mainland listed shares for precisely these reasons and prefer exposure via tried and tested Hong Kong.
Do you think the Asian equity markets correction is likely to be a big movement in the near future?
Yoshihiko Kikkawa, Japan
Hugh Young: Asia had a sharp but very short-lived correction in May/June of this year. It could certainly happen again and would be healthy given the rises we have seen and given that the outlook for earnings’ growth is relatively muted (at c. 10 per cent) in 2007 - yet I suspect it would represent another buying opportunity which is why I would describe it as healthy.
What is the best way for a US investor to invest in India and Asia? If it is through mutual funds, what are the best mutual funds or index funds? Is it possible to reduce the risk of the periodic melt downs in the Asian equity markets?
KG Bhatia, UK
Hugh Young: For a US investor the best way into Asia and India in particular (given the problems of setting up a direct account) is either into US mutual funds investing in the region or into US listed investment companies. Direct Asian stocks listed in the US offer a very narrow spread.
Periodic meltdowns are a risk in any market. Few of Asia’s markets offer index derivatives for hedging so any protection is likely to be of limited use.
The focus in Asia these days seem to be on the large emerging economies of China and India, as compared to the so-called Asian tiger economies in the early to mid 90s. However, unlike then, where the fast-growing economies were accompanied by the booming stock markets, this does not seem to be the case for China (until very recently at least). What is your fund’s strategy to deal with this? Lastly, the $6m question: What is your outlook for stock market return in China for the next five years relative to the other major markets?
Siang King Tan, Hong Kong
Hugh Young: Booming economies do not necessarily make for booming stock markets - witness Thailand which has grown by c. 6 per cent compound since 1990 whereas the stock market has been flat in US dollar terms.
India has one of the better corporate managements in Asia, focusing on returns, whilst China has a young (in terms of experience and understanding) management, which explains its poor performance over recent years.
For us it’s a matter of identifying quality companies wherever they are listed which translates into broad exposure across the region. The traditional tiger markets have been neglected at the expense of the behemoths but corporate governance has improved massively since the Asian crisis of 1997/98 and we are quite bullish as a consequence.
How much of Asian markets’ performance is related to the good health of the US economy? How much of the Asian markets’ performance is related to the relatively open US economy? I am afraid America may become more populist and protectionist.
Mark, Baltimore, Maryland, US
Hugh Young: Asia’s performance is a lot less dependent on the US today than ever it has been. The story of Asia is really one of lifting the lid on economic development in the two powerhouses of China and India.
Yes , US demand is a major component of exports and protectionism (which we fear too) will affect levels of growth but many of the companies who have outsourced or relocated to China are themselves American.
The percentage of intra-regional trade and the level of activity in the domestic economies of Asia have soared over the last decade which supports the argument of decoupling in the event of a US slowdown/protectionism.
What is the outlook for Japan / Nikkei in terms of investment over the next five years?
G.Venkat-Raman, Portsmouth, UK
Hugh Young: If Japan truly embraces the ethos of shareholder returns it could be one of the most exciting countries in which to invest. The shareholder has certainly moved up the list of priorities for Japanese corporates but is still well away from the top.
Japanese corporate culture remains distinctly different and, given a sluggish economic outlook, one has to temper optimism. In Aberdeen’s global funds, we have almost as much exposure to Japan as we have to the US.
What’s your short term and long term view on renminbi’s currency valuation and property valuation’s especially in Shanghai?
James Graham, London, UK
Hugh Young: It is hard to have a firm view on the renminbi over the short-term given it is effectively a managed currency but the long-term trend is for it to rise inexorably. As for property in Shanghai there has certainly been a wave of enthusiasm and prices have risen sharply. There is a wide disparity now between Shanghai and the rest of the country.
Despite a clampdown on property speculation, prices have remained firm. Again over the short-term it is hard to see prices rising given supply but the long-term outlook has to be bullish for Shanghai’s re-emergence as a global city.
Which Asian market do you think will offer investors the best value in 2007?
Hugh Young: The “cheapest” markets in the region are Korea and Thailand, but one can argue they are cheap for a reason - political uncertainty in the latter and poor treatment of minority investors in the former - and may stay that way.
We construct our portfolios on a bottom-up fundamental stock-picking basis and hence have broad geographic exposure across the region.
The Hong Kong equity market has made great gains over the last year. What are your views on the future growth prospects and what is the best way to invest in the Hang Seng?
Tom McCann, UK
Hugh Young: The Hang Seng and Hong Kong are not necessarily one and the same. The Hang Seng has been driven by Chinese shares listed in Hong Kong such as China Mobile. For exposure to the Hang Seng itself, I would recommend an indexed investment such as an ETF or future.
Comparing with other BRIC markets, China appears to be laggard, despite the recent rallies. On account of the continued economic growth, how far do you think the Chinese market might outperform the others? Also with the abundant liquidity of the Hong Kong stock exchange, mainly driven by the international investors, what would be the impact on the other Asian markets?
Kaili Jen, Taiwan
Hugh Young: China is a mixed bag in terms of quality investment opportunities. Its economy is one of the fastest growing in the world but this does not necessarily equate to investment returns. The Chinese equity markets have performed well this year, in spite of, or because of, a spate of new issues, notably from the large state banks.
We’re not necessarily looking for Chinese stocks to outperform other BRIC markets but we are looking for sustainable shareholder returns at a reasonable price. The quality of Chinese companies is certainly improving yet still lags that of India.
As a US investor, how worried should I be about investing in Asian equities if there is a sharp slow down in the US economy? Which countries or sectors in Asia do you believe will provide the best returns in 2007 and why? Vietnam is one of the fastest growing economy in Asia with GDP growth rate of about 8 per cent. Is its economy likely to grow even faster after it gets access to the WTO? Do you think investing in Vietnam now is a good idea? If so, what investment opportunities are available for US investors?
Kenneth Hahn, US
Hugh Young: The region is far less dependent on the US today than ever it was. On Vietnam specifically the stock market is tiny and valuations have been driven up on liquidity. It is undoubtedly an exciting economy and many of the companies in which we invest elsewhere in the region have started operations there. Access to Vietnam is best through long-established funds such as Dragon Capital.
The Stern Review talks about poorest countries and people suffering the effects earliest and most. What is the potential for green energy, carbon trading and environmental services in Asia (apart from China and India)? Are Asia’s biggest corporations set up to produce low carbon products and services? Which countries and sectors are most likely to be negatively affected by the findings of the Stern Review?
Dr Kenny Tang, London, UK
Hugh Young: Asia is still well behind in terms of environmental issues - witness the Three Gorges Dam and the haze from Indonesia. The focus is on economic growth, often at the expense of the environment - not a dissimilar policy from that historically adopted by the developed world.
To be fair there is more and more pressure being applied on the environmental front, not least by shareholders such as Aberdeen, and we are seeing a better response.
Based in Singapore, Mr Young seeks to identify undervalued investment opportunities, drawing on detailed company analysis, a fundamental stock-picking style and a network of contacts built up during his years of working in Asia. He has seen the rise of the Asian tiger economies, their fall in the 1997 regional crisis and their subsequent resurgence.
His £1.1bn Aberdeen Asia Pacific Fund has risen 972 per cent since launch in 1987. Over the last five years, it has risen 156 per cent compared with 128 per cent for its benchmark, the MSCI AC Asia Pacific ex-Japan Index. The larger $5.9bn Aberdeen Global-Asia Pacific Fund has risen 767 per cent since launch in 1988. Over the last five years, the fund has gained 234 per cent compared with 199 per cent for its benchmark.