Emerging markets in Asia are off to a rocky start this year. Fears of rising inflation and further monetary tightening have led to an outflow of foreign funds.
Yet, so far, fund managers in Asia are playing a game of wait and see. Aadil Ebrahim, managing director of Bowen Capital Management, who oversees $100 million told CNBC that nearly 20 percent of his China and India funds are now in cash.
James Chirnside, chief investment officer of Asia Pacific Asset Management who manages a portfolio of US$83 million said he’s keeping 60 percent of his funds in cash, ready to jump back into equities when another correction happens. That’s the highest level of cash holdings for his funds since the financial crisis 2 years ago.
Losing Their Shine
The trend is hardly a surprise. According to a survey of global fund managers by Bank of America-Merrill Lynch in February, professional investors are shunning emerging market stocks, eager to escape potential inflation traps.
Only 5 percent of global fund managers favor developing markets. And India is the least favored of the lot. The Sensex Index is one of the worst performers in the world after Egypt, declining 11 percent so far this year. As a result, stocks in that market have become cheaper and currently trade at a forward price to earnings (PE) ratio of 14.5.
Last year’s super performers, Indonesia's Jakarta Composite and the Philippines Stock Exchange Index, have also lost ground, with the Jakarta Composite down 5.5 percent this year. Stocks in Philippines now trade at a forward PE ratio of 12.6, cheaper than the PE of 13.7 for the S&P 500.
Chinese stocks are faring a bit better, although inflation fears are keeping investors on the sidelines.
Chirnside said the pressure is likely to continue in the short-term, but he’s not overly concerned about Chinese equities over a longer period of time.
“Look, the money is coming back. We're bullish, medium to long term. We don't think stocks are expensive right now, but we’re waiting for the right time to get back in. That may happen in a matter of months, as early as the second quarter.”
The Tipping Point
Chirnside said the tipping point will come when central banks in the developed world start raising interest rates. “Markets are very sensitive to the Fed’s move, and there’s likely to be a knee-jerk effect when that happens. That’s when we’ll start buying.”
Ebrahim of Bowen Capital said he’s sticking to his strategy of waiting for inflation in China to peak. And that, he said, will take place by May or June.
“We’re going to see a mega rally in China when that comes about. And we need to be invested to capture the opportunity.”
But there’re some who believe that Chinese stocks are already a screaming buy today.
Erwin Sanft, Head of China and Hong Kong Research at BNP Paribas Securities said China’s A-share market has probably bottomed. He also sees rich pickings in Hong Kong, with an upside of 30 percent for Chinese stocks there.
“People are getting over the inflation fears; there are cheap stocks everywhere.”
What to Buy
Sanft is betting on investment driven sectors such as property, material, construction and alternative energy. These, he said, had taken a beating in the last year, and are now trading at below average valuations.
“With M2 growth of at least 16%, China remains an investment driven economy. So taking bets against these sectors is the wrong thing to do at this point. We’re expect these firms to deliver very good earnings growth in the next 2 to 3 years.”
Chirnside of Asia Pacific Asset Management agrees. He believes that Chinese stocks will outperform global equities, after a short-term correction.
He also likes South East Asian markets that have been keeping their currencies undervalued. “These countries have a better grip on countering inflationary pressures, as they’re able to revalue their currencies if need be.”
As for India, Ebrahim believes the inflation scare has run its course.
“Onion prices have crashed, and India is looking forward to a bumper wheat crop from the winter harvest. The scare is done; you’ll likely see an easing of prices in the coming months.”
CNBC's Cashflow is telecast live every weekday at 10:00am Hong Kong and Singapore time.