Credit Woes Boost Hong Kong, Drag On Taiwan

Hong Kong, seen by some as a haven in Asia during times of financial volatility, came out as a favorite among international fund managers in August as U.S. subprime woes roiled financial markets, according to Dow Jones Newswires' monthly poll of fund managers active in Asia.

Hong Kong has long been seen as a safer way to invest in China's growth. Not only have valuations in Hong Kong been lower, but as a more developed market than those in Shanghai and Shenzhen, Hong Kong's stock market is more liquid. Although this liquidity can be a recipe for volatility, it also appeals to fund managers who don't want to be parked in a market with no way out. As Chinese regulators loosen up restrictions, allowing more mainland Chinese investors invest in Hong Kong stocks, Hong Kong's stock market is poised to see even more interest. Hong Kong's status as a safe haven could now "with its fast growing financial ties to China...become even more pronounced," said Nicholas Brooks of Henderson Global Investors. The loosened rules came as the Chinese yuan is appreciating against the Hong Kong dollar, helping make Hong Kong assets more attractive to mainland investors. Back in January, the yuan moved up to parity with the Hong Kong dollar for the first time in a decade. One yuan is now worth 1.03 Hong Kong dollars. Fund managers, on average, moved Hong Kong to a solid overweight in August, its highest weighting in months, up from slightly overweight. A dip in Hong Kong's Hang Seng index earlier in the month helped make for some better values, fund managers said. If changing credit conditions helped boost Hong Kong's appeal, the same issues weighed on the Taiwan market. Taiwanese stocks - a favorite last month - declined to a slight underweight in this month's poll. Taiwan's economy, which is tipped heavily towards technology and semiconductors in particular, is very much dependent on U.S. demand for its exports. Tightening credit markets increased fears about the U.S. economy falling into a recession, which would bode badly for Taiwan. The subprime concerns "seem more serious and we think it may cause a slow down in the U.S. housing market which may affect U.S. consumers and cause them to demand less products from Taiwan," said Grace Tam, investment services manager at JF Asset Management. J.P. Morgan Securities downgraded the Taiwan stock market to underweight within its regional equities portfolio on Monday. "Given that Taiwan is the emerging market with by far the highest exposure to the global consumer, the risk of earnings downgrade is increasing, notably in tech," a J.P. Morgan analyst wrote. While the island's tech sector stays under close watch, Taiwan materials and financial segments remain favorable, the firm said. In other parts of the region, Indonesia got a solid overweight weighting while China and India are slight overweight. Old favorites China and India have continued to stay on the radar, despite historically high valuations, because of long-term growth prospects. Indonesia, on the other hand, has been seeing increased interest because of relatively lower valuations. Indonesia was "the last market to recover post crisis," notes Prudential. Indonesian companies are now posting strong earnings, notes JF Asset Management's Tam, and though the country's central bank stopped cutting interest rates recently, it has room to do so again in the near future if inflation remains benign. An interest rate cut would benefit property and financial sectors.

Better Value Outside Asia

Asia-focused funds started seeing outflows in August as Asian markets rebounded on the Federal Reserve's discount rate cut, pushing the region's stock prices higher. According to Citigroup, redemptions from offshore Asian funds climbed to $2.6 billion last week. With prices in Asian markets continuing to climb, relatively cheaper European stocks have been more attractive. "Asian equity markets look poor value relative to equities in developed economies. While it is probably right to assume that output and profits growth will be faster in Asia over the medium-term, it is also true that volatility is likely to be higher too and that should be reflected in valuations," said Henderson's Brooks. 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, Credit Agricole Asset Management, Henderson, Halbis, ING Investment Management, JF Asset Management, Prudential Asset Management, Schroder Investment Management and Standard Life Investments. For the survey, each participant was asked to assign recommendations to each asset class. The weightings from each fund manager were then averaged: 0 is neutral, up to +0.5 is slightly overweight, above +0.5 to +1 is overweight, above +1 is very overweight. Meanwhile, 0 to -0.5 is slightly underweight, below -0.5 to -1 is underweight, below -1 is very underweight.