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SCMP Reporter

GLOBAL Asset Management's John Mytton has gone straight down Route 1 with his GAM Asian Fund, concentrating his investments in HSBC and Singapore's Big Four banks.

 'In Asia we are going to see instances of the strong becoming stronger as the recovery takes place,' he said.

 The former schoolboy recruit of HSBC has made the Hong Kong heavyweight his top holding in the fund, with 8 per cent of the US$44.9 million fund, while Singapore's Big Four banks all feature in his top 10 and make up about 20 per cent of the fund.

 HSBC and Singaporean banks might seem obvious and unadventurous choices for an Asia ex-Japan fund, but Mr Mytton started building up his positions in them in the dark days of August last year.

 Singapore's banks were trading at half their book value but the fallout from the Long-Term Capital Management and Russian crises kept their share prices under pressure.

 'Quite honestly, by the end of September I was very nervous because we were suffering enormously,' he said. 'It just kept coming down, there was such negative sentiment.'  But the regional rally since is now history and Mr Mytton was well placed to benefit from it.

 He quoted figures from fund-tracking firm Micropal, which show the fund is up 96.08 per cent for the year to September 10 and up 31.79 per cent for the six months to that date.

 His fund now has 30 per cent in Hong Kong and another 30 per cent in Singapore, hugely overweight against a benchmark of 10 per cent for the city state.

 Despite the hefty rises by HSBC and its Singaporean counterparts, Mr Mytton plans to hang on to his holdings in the expectation of even greater gains.

 'We have largely concentrated the investments in Hong Kong and Singapore because we think these economies will recover more fully than other Asian economies because of the strength of their banking systems,' he said.

 'We believe these stronger banks will incur far greater profits. The Hongkong Bank [HSBC] has generally been a beneficiary of crisis in Asia because it has always been able to expand its franchise and to acquire assets cheaply. Given the extent of the economic decline in Asia, it is remarkable that the Hongkong Bank earned an 18.5 per cent return on its equity.

 'While the Seoulbank transaction has fallen through, there are going to be other opportunities for HSBC to expand its franchise in the region.

 'Certainly there has been a considerable flight to quality to institutions such as HSBC, particularly in the private banking segment.'  Mr Mytton, a Briton, is impressed by the way Singapore has handled the crisis. Coming off the low base of last year, corporate earnings would grow 70 per cent across the board this year and by a further 40 per cent next year, he estimated, with 70 per cent of that improvement concentrated in Singapore's banks and property companies.

 In addition, the authorities were looking to push for mergers among the big four banks, Mr Mytton believed.

  'We feel that further consolidation for the sector is likely, which will also engender good returns for investors,' he said. 'Even today they [Singaporean banks] are trading at two times book so even on a global basis they look reasonably attractive.'  Besides that there is the funds-flow argument.

 Mr Mytton said the idea that this year's gains in Asian markets had been fuelled by waves of capital from abroad was a bit of a myth. Retail buying had been the main driver to date.

 'As yet we don't think we have seen a large weight of money coming into these Asian markets. A number of global funds are still extremely underweight Asia,' he said. 'In due course, as and when prospects are seen to be improving, some of this global money will return to the Asian markets.

 'I suspect that in the second half or the last quarter of this year we are going to see rallies in the Hong Kong market and in Asian markets in general.

 'I think an enormous amount depends on what happens with the American market. As long as the American market remains stable I think we will see further liquidity flows into Asia. I'm not of a view that a weak American market will lead to improving Asian markets.

 'If institutional money returns to the region, it will tend to focus on the better-managed businesses with excellent franchises, and businesses like HSBC will be the beneficiaries.'  What has helped keep Mr Mytton optimistic is the way growth in Asian countries keeps beating analysts' expectations. For example, early this year analysts were putting Singapore's growth for the year at between zero and minus 2 per cent. Now they are predicting 5 to 6 per cent.

 'Most analysts were behind the curve. As expectations for the economy improve by the same token, stock markets will improve,' Mr Mytton said.

 Beyond the banks, another of his favourites is Samsung Electronics, in which he has built up his third-biggest position. The price of the counter has more than doubled since he bought it, helped by strong orders and rising prices for its key product DRAM memory chips.

 DRAM chips are now treated as a commodity, with highly volatile prices. From a low of US$5.50 for a 64 megabyte chip in May, they soared to $15 in the middle of last month (September) as demand outran supply. Samsung forecast the price could go to $20 and reported a year-on-year rise in July sales of 54 per cent.

 'Samsung Electronics is the most technologically efficient producer. It has an approximate 18 per cent global share of the DRAM market,' said Mr Mytton.

 While big rises in output and exports showed the Korean industrial machine was beginning to function again, Mr Mytton said he would not be looking to raise his holdings there.

 'If Taiwan were to weaken, I suspect I would reduce Korea slightly and go to Taiwan,' said Mr Mytton.

 For the other countries in the region, GAM's investment director in Hong Kong tends to concentrate his holdings in just a handful of stocks, often in companies where he knows the management well through his 20 years in the region. For instance, while Thailand made up 9 per cent of the fund in the middle of August, that was in just three holdings.

 'I've known some of these places reasonably well and that also determines my attitude towards investing,' he said.

 Perhaps the country he knows best is the Philippines. He spent a good part of his childhood growing up in a mining community there - his father was an expatriate engineer - before being sent to boarding school in England.

 That long experience in the region is invaluable in helping him dig up the gems from the rubble left by the Asian crisis.



Big banks mean strength in Route 1 strategy