Riding the gravy train of Asia's top stocks

PUBLISHED : Sunday, 28 June, 2009, 12:00am
UPDATED : Sunday, 28 June, 2009, 12:00am

With sound liquidity and solid balance sheets, the consensus is that Asian companies are recovering fast. If you share that optimism, which countries and what stocks should you be looking at?

Despite dropping off occasionally, Asian markets have seen gains overall. The MSCI Asia Pacific Index has gained 15 per cent, and the index excluding Japan has risen more than 33 per cent so far this year. It is not for nothing that most equity analysts are bullish on the long-term growth of the Asian markets.

For retail investors, the most common way to access the wider Asian stock markets is through funds. MPF funds, for example, offer different types of Asian equities. If funds do not appeal to you, directly buying stocks that offer prospects of strong dividend growth and capital gains could be a good option.

But remember, given the higher trading costs of trading Asian stocks, going for the long haul is always more cost-effective.

So how difficult is it to buy Asian stocks listed on markets outside Hong Kong? Not very, depending on who you are dealing with and what you are angling for. Large securities dealers and brokers in Hong Kong generally provide broking services on Asian shares. Banks such as HSBC also offer such services, but only to HSBC Premier customers. Their fees are likely to be higher than those of securities dealers.

The fees for Asian stocks vary from country to country but they are significantly higher than Hong Kong stocks. Mainland A and B shares are the cheapest - about 20 per cent higher than Hong Kong stocks. Outside China, the Asian stocks most sought after by Hongkongers are those of Singapore, Thailand, Japan and South Korea. But fees are at least twice as much as those for Hong Kong stocks, ranging from 0.4 per cent to 1 per cent of stock prices.

Markets such as India and Vietnam are harder to access, with few brokers offering services for their stocks. For others, depending on regulations in individual countries, there might be additional charges on sell orders, such as stamp duty, tax or government levy. So you must clarify these with the broker before getting into these stocks for a more accurate picture of the actual costs.

HSBC Premier offers execution and brokerage services to customers but offers no advice. Securities dealers provide updated data but investors have to do their own research. Private banks, however, offer stock recommendations and advice along with execution services and even provide access to difficult markets. The average entry point for private banks varies from bank to bank but in general investors need to have at least US$1 million in liquid assets.

Apart from Hong Kong stocks, the top 10 holdings in monthly reports of fund managers consistently include large-cap companies listed in South Korea, Taiwan and Singapore although some of these shares can be expensive. Less conservative investors should also take a look at the Asian mid-caps, which, some fund managers say, offer better value with a lower point of entry.

Singapore's banks have performed unexpectedly well in the first quarter of this year, making them a favourite with fund managers. RBS has a 'buy' rating on all three Singaporean banks - DBS, United Overseas Bank (UOB) and OCBC.

RBS analyst Trevor Kalcic has raised UOB's target price from S$11 (HK$58.62) to S$17. This is because the bank's net profit in the first quarter of this year beat RBS' forecast by 29.5 per cent. Mr Kalcic said the positive surprise came from UOB's strong net interest margin and excellent cost control. He expects the bank's earnings for the rest of the year to grow.

Mr Kalcic has also raised OCBC Bank's target price from S$7 to S$8. The bank's net profit in the first quarter beat forecasts by 53.2 per cent. In a report the analyst says the performance of Singaporean banks would be strong enough to offset any nasty surprises in asset quality. Like OCBC, DBS' first-quarter performance beat Mr Kalcic's forecast. He has set the bank's target price at S$14.

Another RBS analyst, Nirgunan Tiruchelvam, is big on Singapore-listed Noble Group, which, he holds, will benefit from a recovery in international trade. With a 'buy' recommendation, its target price has been increased to S$1.74 from S$1.52.

A conglomerate in agricultural, industrial and energy products, Noble Group is headquartered in Hong Kong. It recorded a 35 per cent drop in revenue to US$6.1 billion in the first quarter of this year mainly because of a fall in commodity prices. The RBS analyst is still upbeat on the company, saying it will improve as international trade picks up this year.

Taiwan stocks have also generated a lot of interest of late. The island's equity market has been on a roll ever since China Mobile announced taking a 12 per cent stake in Taiwan's Far EasTone in a record-setting US$525.9 million deal. The Taiwanese market has risen 16 per cent since April as a result.

Dennis Lai, senior portfolio manager of RCM, a subsidiary of Allianz Global Investors, says this will have a positive effect on Taiwanese stocks although he is not sure on the short-term growth of the technology sector as US demand continues to be weak.

In the event of a sustainable recovery in demand, Taiwan Semiconductor Manufacturing Company (TSMC) - the world's largest dedicated independent semiconductor foundry - is favoured by many fund managers including Invesco and Schroders.

Another Taiwanese stock popular among fund managers is Chunghwa Telecom, which provides local and international long-distance services.

Thailand's Siam Commercial Bank also makes the top 10 list. Tipped to outperform in the long term, the bank had the largest mortgage loan portfolio in Thailand at the end of 2008. According to UBS research, this represents a 26 per cent share of Thailand's mortgage lending market. South Korea's large caps are among the more expensive stocks in Asia. An example is LG Household and Healthcare. The stock was introduced by First State Investments to its Asian equities fund earlier in the year as it saw in it medium-term growth potential. The company is a strong domestic brand and has a good track record of improving profits margins, the fund manager noted in a report.

Simon Smiles, product manager at UBS, says in his research on Asian investment themes that the demand for cosmetics and personal care products will continue to grow in many Asian countries such as South Korea as a result of an ageing population and the rising purchasing power of women. That could bode well for Korean department store group Shinsgae. The stock is among the top 10 holdings of Skandia's and First State's Asian equity funds. The company has also branched out into the beverage sector by acquiring Coca-Cola Bottling in 2007.

The won has regained 45 per cent of its value before the fall last year when South Korea's central bank spent a large proportion of its reserves to prevent further depreciation of the currency and injected cash into the banking sector by backing bank loans. Some analysts believe that these stimulus measures will reflect on South Korea's export market.

One of the most expensive shares held by many fund managers is Samsung Electronics, a household name the world around, and hence a defensive play. The electronics conglomerate is cautious about earnings prospects for the rest of this year, according to a report by RBS analyst Jeffrey Toder, who downgraded the company from 'buy' to 'hold' last month with a target price of 600,000 won (HK$3,600).

Taking a leaf from long-only fund managers' playbook could be an idea, but it may not necessarily be foolproof. Neither is gathering and processing information on regional stocks an easy task. This is why independent financial planners and advisers often recommend multimanager funds, which remain a cheaper way to gain broad exposure to Asian large-caps.

Multimanager funds invest in other funds. But some invest in shares through investment managers, so you need to be aware that there is an extra layer of fees involved.