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South East Asia: A window of opportunity?

FPG Research looks at how managed funds investing in South-East Asia have done in the past six months.

Tuesday, June 2nd 1998, 12:00AM

by Philip Macalister

The past six months have been a tumultuous time for Asian financial markets. While most financial markets recovered their losses from last October within a short period of time, the markets in South-East Asia have been slow to recover.

 

How did they perform?
The major world market indices had periods of recovery during the three months following the corrections in October, however not all managed investments shared in this recovery. On average, managed investments continued to produce negative returns into November, and any gains made during December were temporary and were lost again in January.

The largest monthly slide for all managed investments was in October, when the indices had their first major downturn as part of the crisis. The Hang Seng index dropped 4,426 points during the month, equating to a 29.41 percent loss, a trend followed by the other major Asian market indices.

 

FIGURE ONE: One month average returns for managed investments investing in South East Asia and market indices, 30 September 1997 - 31 March 1998

The values of individual retail managed funs investing into South-East Asia also fell sharply in October, with the net one month gross return averaging -12.40 percent across all three product types. Some managed investments experienced losses nearly double this, with the hardest hit being the Tower Spotlight Asia Fund, which returned –26.22 percent net for October. The insurance bonds tax group fared better as a whole, with an average fall of -10.06 percent net for the month, with the largest drop in value among insurance bond managed investments being experienced by the Guardian Assurance Pacific Equity Fund, which returned -14.65 percent.

It was not until February and March that most investors received any significant returns from their managed funds investing in South-East Asia. The strong performance during these two months translated into strong returns for the March quarter. The highest three-monthly net returns across the three product types being achieved by Armstrong Jones Asia Pacific Share Fund (37.12 percent net), the AJ SIL 60s+ Pacific Basin Share Fund (22.34 percent net), and the Royal & SunAlliance Lifeplan Far East Fund (8.80 percent net).

While returns have been stronger in recent months, managed funds investing in South-East Asia have far from recovered the losses incurred in the months immediately following the market downturns. The six-monthly net returns for managed funds investing in South-East Asia remain predominantly negative, averaging -10.14 percent for unit trusts, -7.67 percent for insurance bonds, and -4.42 percent for superannuation trusts up to March 31.

Asset allocation
An examination of the asset allocations shows that the returns have been linked strongly to the specific South-East Asian countries in which they have been invested.

 

FIGURE TWO: Average Asset Allocations of managed investments investing in South-East Asia for period 30 September 1997 - 31 March 1998

Aside from Japan, Hong Kong was the heaviest-weighted country. The two funds with the highest exposure to this market were theJardine Fleming Far East Fund and the Tower Spotlight Asia Fund, which produced a six-month net return of –18.53 percent and –19.82 percent respectively, considerably lower than the average return (10.14 percent) for unit trusts over this period.

Managed funds with a high exposure to Japan tended to outperform other products invested in South-East Asia. The Japanese-specialist Tower Japan Equity Fund returned one of the only positive returns in this six-month period (8.22 percent). The TEA GAM Multi-Pacific Trust, which had the highest exposure to Japan among the non-Japanese-specialty products, returned -2.42 percent for the six months, a significantly better result than funds with a high exposure to Hong Kong.

Putting the Asian crisis into perspective
New Zealand investors had $90.6 million invested in South-East Asia as at September 30 and that fell to $65.3 million by March 31, a fall of almost 30 percent. Nearly $12 million of the fall in value was due to poor product performance, while the remaining $13.4 million of the fall was a direct result of investors selling out of managed funds.

How can we explain this investor behavior? The impact of such significant losses in such a short period of time may have tempted many investors to sell their investments in South-East Asia because of a fear of losing more money. But trends in net inflows into managed funds can also throw light on the behavior of investors in South-East Asian-investing products.

Investors withdrew $13.4 million (14.79 percent of monies invested) from managed funds investing in South-East Asia over the six months to march. To illustrate the comparative magnitude of this movement, net inflows into products investing into international equity markets other than South-East Asia for the same period was $56.8 million, an increase of 5.40 percent.

Outlook for New Zealand investors in South-East Asia
For investors remaining in the South-East Asian market, or those who are deciding whether or not to invest in it, uncovering information as to what the future holds for these markets can be difficult. Often the forecasts will differ significantly, depending on the forecaster.

The optimistic investor will look at the current situation as a ‘window of opportunity’, believing that the downturn has resulted in stocks being undervalued, they will look to exploit this opportunity. They may see the devaluation of the region’s currencies as being positive, driving economic recovery through increased exports due to their low prices relative to the major currencies.

The pessimistic investor, however, will see the current stock values as a true reflection of their value, believing that the current turmoil in the region’s markets is representative of more fundamental problems such as the basic economic and political structure of many Asian countries.

Conclusion
The returns generated by South-East Asian managed funds over the past six months have been volatile. Some managers exploited small market upturns late in the quarter to redeem some of their losses. This seems to indicate that profitable buying opportunities may exist in the region for investment managers who can locate them. The managers who have achieved this have been few, however, and returns on the whole have been poor.

One thing that seems certain about the South-East Asian crisis and its effects is that they have yet to be realised in full. A downturn of this nature across such a large region has flow-on effects to other investment sectors, many of which are still to materialise. It will be some time yet before the impact of the South-East Asian crisis on New Zealanders’ monies invested in the region can be measured fully.

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