Opportunities in US economic slowdown

Monday April 7, 2008
Opportunities in US economic slowdown
By DALJIT DHESI, RACHAEL KAM

THE current credit crisis and the imminent recession of the US economy have not hindered local fund managers from scouting for investment opportunities in the world's largest economy.

Although some fund managers who have exposure to the US market have reduced their investments, they are nonetheless still upbeat on this market, moving forward.

CIMB-Principal Asset Management Bhd chief investment officer Raymond Tang said: “The percentage of our funds' exposure to the US market has been fairly consistent over the previous years, although the absolute amount has declined due to fund redemptions.

“Both our offshore fund managers, Principal Global Investors (PGI) and Templeton Asset Management (TAM), believe that in any market, there are companies that are worth investing in and companies that will outperform, and we share this view.”
Tan Sri Azman Hashim

According to Tang, both firms use stock-picking philosophies – PGI is growth-focused while TAM concentrates more on value strategy.

Both philosophies, he said, focus on stocks that would outperform in the current and future environments.

PGI focuses on stock selection and is sector-neutral while TAM is currently bullish on the telecommunication sector in the US.

Currently, CIMB-Principal Asset Management has four global funds with exposure to the US market. Two of them, sub-managed by PGI, are CIMB-Principal Global Titans Fund and CIMB Islamic Global Equity Fund.

The other two, CIMB-Principal Global Balanced Fund and CIMB-Principal Global Growth Fund, are sub-managed by TAM.
»Overall, there appears to be better prospects for the US later this year« MICHAEL AUYEUNG

HwangDBS Investment Management Bhd chief investment officer David Ng said that despite current events, the company remained invested in the US albeit with a slight reduction in investment.

Ng added that the company was increasingly positive on the outlook for the US real estate investment trust (REIT) market and believed that the market was approaching a period in which there was more upside potential than downside risk.

“The focus will be on property stocks with defensive characteristics and to reduce exposure to stocks which are highly correlated with economic conditions,'' Ng noted.

HwangDBS Investment Management has seven offshore funds, of which four have direct exposure to the US market – the HwangDBS Global Property Fund (GPF), HwangDBS Global Infrastructure Fund (GIF), HwangDBS Global Opportunities Fund (GOF) and HwangDBS Environmental Opportunities Fund (EOF).

AmBank Group chairman Tan Sri Azman Hashim said: “As for the funds management division, we offer retail funds that have invested in the global market, including the US market, via feeder funds.

“In this instance, the group is not exposed to the US market as it is purely unit trust funds that we offer to the public to expand our product coverage.”

Azman said that at present, the group would avoid the US market until the outlook was clearer. “We will watch very closely the credit crunch situation and the policies by the Fed to alleviate the current condition of tight liquidity,” he said.

Pacific Mutual Fund Bhd chief executive officer and chief investment officer Michael Auyeung said although it was underweight on the US market at the moment, he was confident the country's economy would recover later this year from the slowdown and possible recession in the first half.

Auyeung said: “We are generally stock pickers, and in the US, we have invested in some technology sectors that are consumer oriented. We also hold defensive positions in the drug sector along with consumer staples, as well as some energy plays.

“The company is also growing more inclined to look at the financial sector on further bad news flows and price corrections in that market.”

On a global portfolio basis, Pacific Mutual is very underweight on the European markets, underweight on the US market and overweight on emerging markets, especially Asia.

On the outlook of the US market and economy, Tang said: “I believe the macro environment has deteriorated in the last 12 months, and will continue to be volatile for the next six to nine months.

“We are hopeful that the US credit crisis will be resolved by the end of this year, paving the way for a recovery next year.”

Auyeung added that the company believed the US may just skirt a recession, but even if it did, it would be similar to the last two in that it would be “short and shallow”.

“Generally, the US market has progressively discounted much of the bad news and is now moving off well formed bottoms in anticipation of a recovery scenario. Even in the housing market, the signs are there to suggest a slowing of bad news from the sector.

“The stimulus package in the country will also be a big help and may act as a catalyst for economic recovery, or at least confidence. Overall, there appears to be better prospects for the US later this year, especially if commodity prices ease off the accelerator and the US dollar stabilises,” he said.

According to Azman, the outlook of the economic activity in the US is steadily weakening, accompanied by the forced credit derivative deleveraging process, which was signalling further blow-ups in the credit market.

“The latest Bloomberg consensus is projecting 2008 growth at 1.8% with a pick up in 2009 at 2.6%. This has come with the lower limit of the revised 2008 Fed growth forecast of between 1.8% and 2.5% from the earlier 2.5%- 2.75%.

“The most forward-looking part of the March 18 Federal Open Market Committee statement showed that the outlook was uncertain. The decision to cut the Future Federal Fund Rate was driven by the fear of a much deeper and broader economic recession.

“In the Fed’s words, the outlook for 'economic growth had weakened further' and downside risks remained,'' Azman added.

Ng added that overall, 2008 could be a good year for investments, as various risks would have already been discounted.

HwangDBS Investment's approach in the coming months would be to focus on US stocks with more defensive characteristics, he said.