Investors Eye Taiwan, Korea For Bargains

International fund managers are giving Taiwanese and Korean stocks a closer look as they hunt for bargains in an increasingly expensive Asia.

Managers bumped South Korea up to a solid overweight in July - its highest weighting in months, according to Dow Jones Newswires' monthly poll of fund houses active in the region. Similarly, they turned neutral on Taiwan after being underweight on that market for several months. "Both of these economies are very well geared into the manufacturing cycle," said Nicholas Brooks of Henderson Global Investors which has about $120 billion worth of assets under management. And now both are "benefitting from a pickup in the global industrial cycle." Taiwan's technology sector, which has lagged, is likely to attract more interest in next few quarters, Brooks said. On Tuesday, Taiwan's Ministry of Economic affairs said that June export orders increased 15.19% to US$28.70 billion from a year earlier. The rise was faster than expected and the government said orders may accelerate further in July. Further enhancing the outlook: political concerns have eased as both main political partiesselected their presidential candidates ahead of elections next year, helping clear up some political uncertainty, fund managers say. Taiwan's stock market rose 10.1% in June, becoming one of the best performing markets in the region. Despite that, prices in Taiwan are still cheap compared to other Asian markets and more growth is expected. Citigroup raised its target on the Taiwan index by 25% Friday to 12,000 from 9,550, citing the improved political situation, inflows, and earnings momentum. "After being in the underperformer category for seeming perpetuity, Taiwan catapulted itself to being one of the best performing markets," said ING's head of Asian equity investments, Bratin Sanyal. But while foreign investors are pouring into Taiwan, local investors are selling amid continued political unease. "Politics are always a bit of an issue there and with elections coming up, it could be that domestic investors are being more conservative," said Brooks. JF Asset Management, which is underweight on Taiwan because of political concerns, is nonetheless overweight on some Taiwanese technology firms. With Korea, valuations are also an important part of the story. "Despite year-to-date outperformance relative to the region, the market is still trading at about a 15% discount on a price to earnings basis, said Halbis, part of the HSBC Group. HSBC manages about $327 billion in assets globally. Korean companies are also benefitting from the global resource boom because they make a lot of the machinery involved in resource extraction as well as ships used for transport of resources. Fund flows into funds focused on Taiwan and Korea, as well as China, have been taking in most of the fresh money out of all country funds, according to Citigroup. Korea equity funds saw 11 straight weeks of net inflows, according to EPFR Global, with about $1 billion moving into the funds between early May and mid-July. Asian markets are relatively insulated from the U.S. subprime fallout, market watchers say. Companies in the region tend to have little in the way of debt, which means servicing debt won't be as much of a problem as subprime concerns pressure credit markets. There's less risk of a crash in the housing prices than in the U.S. and Europe, where cheap credit has driven housing prices to new highs. There's also more internal growth in the emerging markets. The biggest risk to the region is if subprime fallout pushes the U.S. into recession, which would put a cap on demand for exports from Asia, funds note.

Europe Still A Favorite

Flows continued into Asian funds in July, but Europe remained the favorite worldwide. Fund managers, on average, had a solid overweight weighting on Europe, compared to a slight overweight on Asia, excluding Japan. Markets in Asia excluding Japan have been trading around 14 times expected 2007 earnings, compared with Europe, which trades at about 13.2 times. Earnings growth in Asia is also lagging behind that of Europe, at 17% annually compared with 20% in Europe. Despite the figures, fund managers stay in Asia for the anticipated long-term growth. Each month, Dow Jones Newswires surveys fund managers on portfolio weighting recommendations for the succeeding months, with most looking at a 12-month horizon. This latest survey was taken over the past 10 days. The respondents for this month's survey were Aberdeen Asset Management Asia, Allianz Global Investors, Credit Agricole Asset Management, Henderson Global Investors, Halbis, ING Investment Management, JF Asset Management, New Star Global Investment Funds, Schroder Investment Management and Standard Life Investments.