AMP Capital Investors stays on the defensive

This is part of an AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.

Karma Wilson is the Sydney-based head of Asian equities at AMP Capital Investors. She joined the fund house in September 2006 and is responsible for developing its pan-Asia investment capabilities, in particular developing product options to provide investors with access to Asian listed equities. She has more than 10 years of funds management experience, covering a range of global equity portfolios. Prior to joining AMP Capital, she worked for global boutique asset manager Five Oceans Asset Management where she was responsible for investments in Asia and Japan. She was previously a senior portfolio manager at Goldman Sachs based in Hong Kong, Singapore and New York and spent a number of years covering Asian equity markets as a member of Bankers Trust's international equity team.

AMP Capital InvestorsÆ Asian equities team covers China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Taiwan and Thailand. The fund house manages more than $102 billion in assets worldwide.

What are the biggest opportunities that you see in the coming 12 months?

Wilson: During challenging economic conditions, market participants tend to become highly risk averse which creates opportunities for investors. In these conditions, the market favours liquidity so stocks in peripheral markets or with small market capitalisations may be sold down heavily. Industries that are out of favour during economic recessions tend to be shunned and value may be created in dominant companies within these industries as they can gain market share in difficult environments at the expense of their weaker rivals. By investing with a long-term horizon in mind it is possible to take advantage of transient trends, which create value in the market.

How has the global financial crisis affected the way you manage your portfolios?

During the recent global financial crisis we have been favouring stocks whose earnings are likely to be more resilient in difficult economic conditions. This means focusing on defensive sectors such as consumer staples, telecoms and utilities and has meant earning expectations for our portfolio stocks have generally held up better than the market. It has become even more important to look closely at each companyÆs balance sheet and earnings resilience as well as their corporate governance practices.

We aim to ensure our portfolio retains flexibility so we can be nimble and take advantage of investment opportunities when they arise.

What is the biggest lesson you have learned from the US credit crisis?

The integration of global financial markets has created a new dimension of investment risk. The contagion from the US mortgage crisis has been unprecedented. A stress fracture in one part of the world can now affect the financial stability in distant markets. The flow on effect to economies that are also inter-related means seemingly sound financial systems are not necessarily immune from a global financial crisis.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?

We have been focusing on defensive sectors that are best placed to withstand difficult economic environments. We have also increased our focus on companies that are benefiting from falling commodity prices such as utilities companies that are benefiting from the fall in coal prices.

What are your favoured markets in Asia?

We continue to hold a favourable view on China over the long-term and believe the Chinese economy is relatively well placed to withstand the current global downturn.

We believe the long-term prospects for India are also strong however they will face challenges over the short-term as they do not have the fiscal strength or flexibility of China to offset the global slowdown.

What markets are you bearish over?

Both Taiwan and Korea are cyclically exposed to the current economic crisis, Taiwan through its technology sector and Korea through its industrial sector. Both these sectors will be heavily hit by the economic crisis and that will have an immediate negative flow on effect to the economic position of each country.

What are your market weightings within an Asia ex-Japan equities portfolio?

China - 31.1%
Hong Kong - 10.7%
India - 11.2%
Indonesia - 2.05%
Korea - 12.6%
Malaysia - 2.03%
Pakistan - N/A
Philippines - 2.1%
Singapore - 9.7%
Sri Lanka - N/A
Taiwan - 7.6%
Thailand - 2.5%
Vietnam - N/A

*Figures have been rounded.

Which sectors do you expect to outperform in the coming year?

Asian companies have only begun to seriously feel the effects of the economic crisis in the fourth quarter of 2008. The full impact of the crisis is expected to hit during 2009 so defensive stocks in sectors such as consumer staples, telecoms and utilities are best placed to ride through the storm during the coming year.

Which sectors do you expect to underperform?

The industrial, technology and financial sectors are cyclically exposed to the global slowdown and are consequently expected to face challenging times in the year ahead.

What are the main challenges that you expect to face in the coming 12 months?

Portfolio flows out of the region are severely affecting stocks in a way that is often unrelated to their fundamentals. Institutional investors seeking to meet redemptions are also causing adverse stock movements. However, these erratic stock movements may create solid buying opportunities.

What are the main risks of investing in Asia at the moment? How are you managing those risks?

The biggest risk facing Asia at the moment is the length and depth of the global economic crisis. Clearly, the longer the crisis continues the more heavily Asia will be impacted. On a positive note, however, there have been limited corporate failures in Asia so far this year and the region as a whole is in a much stronger position than it was when impacted by the Asian Crisis. To manage the risks that are currently being faced we are continually undertaking stress tests on our portfolio stocks to determine their vulnerability to a more sustained slowdown.