InvestmentsAug 8 2014

Rally in defensive Asian stocks ‘is over’

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Star Asia manager Jonathan Pines has suggested the long rally in defensive income stocks in Asia may have come to an end.

Since the financial crisis, Asian income-producing non-cyclical stocks have significantly outperformed the rest of the market, leading to substantial gains for Asian income funds.

But Hermes Fund Managers’ Mr Pines said the valuations on those companies now look very stretched, and he backed cheap cyclical companies to outperform.

He said: “There have been some signs recently that higher quality companies have started to underperform cyclicals, though I don’t know if it is long lasting or if it is just a blip.”

Mr Pines said he had positioned his $664.9m (£393.1m) Hermes Asia ex Japan Equity fund to take advantage of a rotation into cyclical stocks, especially those in north Asian countries such as Korea or China.

He said: “The great deals now are not in non-cyclical stocks, they are in cyclical stocks. We are overweight China and Korea because they have many cheap cyclical companies.”

The manager emphasised he had no particular macro economic reason for favouring China and Korea, but the overweight positions were simply the result of finding companies he likes in those countries.

In a similar way, he has no particular negative view on Indonesia and the Philippines – in fact he acknowledged the macro picture of both countries looks good.

But the Hermes fund has no money in either country, because when Mr Pines screens for stocks matching his criteria “literally nothing comes up because those markets are so expensive”.

His screening process is currently pointing him towards Korean brokerage firms, which he has been buying up for the fund.

Mr Pines explained that the brokerage sector in Korea is made up of a lot of small companies, most of which are of “mediocre quality”.

“But in some cases those companies are trading on a third of book value,” he added. “So they are worth up to three times more dead than alive. That cheapness could be a catalyst all on its own.”

The manager has been buying up companies such as Hyundai Securities in that sector, not just because they are cheap but also because he expects merger and acquisition activity and share buybacks to boost sentiment in the sector.

Since his Dublin-domiciled fund was launched in December 2012, Mr Pines has significantly outperformed the IMA Asia ex Japan sector average, delivering a 41 per cent return compared with the average of 10.5 per cent, according to data from FE Analytics.

Most of that outperformance came in the second half of 2013, when the market briefly switched to favour his positioning in north Asian cyclicals.

His outperformance has coincided with a slump in Asian income finds, the majority of which have topped performance charts in the past three and five years.