DBS FUND MANAGER BULLISH ON ASIA

Roy Phua, who manages the DBS Shenton Asia Pacific Fund, shares his views on the outlook for Asian equities. The fund has returned 7 per cent since the start of the year to July 5, making it among the top performing Asian funds for this year.

Vasu: Will the US economy see a double dip? What are your views on Asia?

Roy: As a house we do not think that the US economy will see a double dip, although there could be more cases of accounting irregularities. However, we are hoping that Asian markets, as a whole, will de-couple from Wall Street. The earnings of Asian companies are arguably more sturdy as they had gone through problematic times in 1997 and 1998, and as a result, they have emerged much healthier. The domestic strength in Asia is very much alive. We see this in South Korea, in the Southeast Asian markets of Thailand and Indonesia, and now increasingly in Taiwan.

Vasu: What's fuelling domestic demand in Asia?

Roy: I think it's a case of reversion to mean. Spending in Asia has been suppressed for the last few years. Domestic savings have risen and personal borrowings have come off. So we are now seeing a pick-up in spending fuelled by savings. As Asian consumers become more comfortable about economic and employment prospects, bank borrowings will increase, giving domestic spending an additional boost.

Vasu: Will global problems overshadow Asia's recovery?

Roy: Some of the current global problems like poor accounting practices in the US are serious, but Asian markets have over-reacted on the downside. The macroeconomic fundamentals are improving. Global inventory levels are low. Corporate spending has bottomed and going into next year, we could see a modest recovery.

Vasu: How attractive are valuations in Asia?

Roy: Excluding Japan, the 12-month forward price-to-earnings (PE) multiples are probably 13 to 15 times and even lower if telecom stocks are excluded. Valuations aside, growth prospects in Asia are better than the US. The region's return on equity, at more than 12 per cent, is also one of the highest in the world. More importantly, there is greater certainty about earnings in Asia compared with the US.

Vasu: Which are the markets you are overweight on?

Roy: Recently, we have raised our weightings in Korea, which is trading at an approximate 12-month forward PE multiple of 10 times. The market could trade up to 12 times. There are some interesting consumer stocks there that are trading at single digit PE multiples with reasonable growth prospects. The period of super growth in Korea is probably behind us but we think that prospects are still promising.

Vasu: Consumer sector aside, what other sectors in Korea look interesting?

Roy: We like the DRAM makers and export-oriented companies like You Eal. The sell-off due to the stronger won is overdone. We also like stocks in the financial sector, which benefit from strong domestic spending, as well as cyclicals like steel and petrochemical companies.

Vasu: What about the risk of the central banking raising rates further in Korea?

Roy: It is not necessarily a bad thing, as the economy is booming and inflation needs to be checked. But the risk of the central bank raising rates again has diminished following the surge in the Korean currency, which helps to check imported inflation.

Vasu: Korea aside, which are other markets do you like?

Roy: Thailand and Indonesia are two other markets which we like, as valuations are still attractive despite the rally over the last few months. Domestic spending is strong in both countries and in the case of Indonesia, interest rates are falling sharply, compensating for the country risk premium. Between the two, we like Thailand more.

Vasu: What about Taiwan?

Roy: Overall, we are underweight Taiwan, but we are overweight the tech sector.

Vasu: And Singapore?

Roy: We feel it's difficult to find attractive stocks in the market, although we like ST Engineering, which offers high dividend yields. We think it will be even more interesting after Temasek's restructuring.

Vasu: What are your aspirations in terms of portfolio returns?

Roy: We hope to achieve 12 to 15 per cent per annum.