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A Straits Affair

Think of investing in Asia and markets like China and India immediately spring to mind. China seems to be preoccupying everyone. And why would it not with the Shanghai Composite Index more than doubling over the last 12 months, thanks largely to nearly 90 million retail investors. Their hunger for a piece of the action has caused share prices to skyrocket.

However, things are not looking so rosy at the moment. In February, the Shanghai Composite tumbled 9%. And after hitting another record high on May 29, the extremely volatile index has lost almost 7% as of June 8. Some analysts are anticipating yet another sharp correction. Norman Chan, director of PCM Capital Limited says, “We expect Shanghai to find major support at around 3,300, but at the moment there still is five to eight percent further downside.”

For investors, who are less than thrilled to ride the Chinese stock market rollercoaster, the good news is, that you have options – very good ones at that.

In fact, many investors are already channeling their funds out of markets like China and into ‘safer havens’. Malaysia and Singapore are the top two beneficiaries of this capital outflow, capturing just over US$1.6 billion worth in investments. The Straits Times Index hit a fresh high of 3579.35 points on 4 June while the Kuala Lumpur Composite Index hit a record 1372.38 points just this past Thursday (7 June). Both indexes have gained more than 40% over the past 12 months.

There are other reasons why Malaysia and Singapore are favored by investors. Compared to their South East Asian neighbors, the two countries boast of having the highest gross domestic product growth, with inflation kept in check.

Also worth considering is Singapore’s success in navigating through troubled periods like in the Asian Financial Crisis. This is largely attributed to well-crafted micro and macroeconomic policies and comprehensive corporate and financial regulations, traits that continue to serve Singapore well to this day.

Malaysia was more severely affected by the financial crisis in comparison to neighboring Singapore. However, in the last decade, the corporate debt-to-equity ratio of ailing Malaysian companies has been sharply reduced. Nonperforming bank loans have been brought down to a more manageable level, and GDP has been restored to pre-crisis levels of around US$100 billion.

“You are starting to see recovery take place … you are starting to see an improvement in industrial perception, you are also starting to see the government starting to do things positively to attempt to attract investment,” says David Roes, CEO of ASEAN Investment Management. And that is the icing on the cake to invest in the Malaysia and Singapore markets.

The Fund

UOB UniFund

Fund Size S$885.32 Million
Initial Investment S$500
Sub Investment S$500
Management Fee 1% per annum
Subscription Fee 5%
*As of 30 April 2007

The UOB UniFund was launched in April 1986 and is denominated in Singapore dollars. Frederick Wong, Director of UOB Asset Management, said that the fund’s strategy is to ride on the long-term structural theme for Asia and apply that to Singapore and Malaysia. He is very positive on these two countries and expects the timeline for returns to be about six to 12 months.

“Malaysian companies offer superior earnings growth and positive earnings revisions. Besides, some companies are in the initial stage of gains due to restructuring. Also, Singapore’s economy should grow above long-term growth rates over the next few years,” he noted.

Just over 60% of the UOB UniFund’s investments are Malaysian listed companies. Wong said that companies are selected based on their absolute returns above a certain hurdle rate. “There is a bias towards Malaysia because we are able to find more companies that meet our projected hurdle rate,” he said.

Real estate and construction are some of the sectors that the UOB Asset Management favors. Wong said that UOB Asset Management “firmly believes that Malaysian property companies are only starting to enjoy the initial fruits from the lifting of the property capital gains tax. Also, some Singapore companies are benefiting from the structural changes which led to an increase in demand for building materials and property.”

The performance of the UOB UniFund is benchmarked against a blended return of the Straits Times Index and the Kuala Lumpur Composite Index. UniFund has soared just over 20% over the last 12 months.

The Affair

Malaysia and Singapore are attractive, 'safer' destinations for investment dollars. Investors should look to them as part of a diversified portfolio. However, ASEAN Investment Management’s Roes, believes that companies there are already fairly priced. He feels that investments in these two countries will only perform with the markets and will not generate higher-than-expected returns.

“From a value perspective, I like businesses that may be holding undervalued assets, companies that have strong balance sheets, are generating strong cash flows, but for whatever reasons are undervalued by the market. There are still good opportunities in Malaysia and in Singapore, but its harder to find those opportunities,” he said.

Still, Roes agrees that the real estate and constructions sectors are looking extremely attractive. “Any company that has large land holdings under balance sheets that haven’t been revalued, with the valuation going on in the market, that is a good opportunity. I would look for the publicly-listed companies that are doing business for the contractors and providing support services because they also will benefit,” he said.

Roes has this word of advice for investors - buy into the markets with a long-term perspective and it will pay off handsomely in the end. “I invest with a two-year horizon, but I am always looking out three to five years. The Asian region has a strong super-cycle to go through. It is evident now, but it will continue at least for 3 to 5 years.”

Send us your questions and comments to us at fundaffair@cnbc.com. We will answer as many of your e-mails as possible on ‘CNBC’s Cash Flow’ airing on Monday, June 11, 10 am to 12 noon Hong Kong/Singapore time.