Inez Chow, senior fund manager of GAM’s Singapore/Malaysia Equity fund, said: “The collapse in the price of oil and other commodities on the back of the strengthening US dollar meant that the Straits Times index lost nearly -10% over the month in US dollar terms. About 4% of that fall was due to the weakening of the Singapore dollar and Malaysian ringgit.

“The August earnings reporting season was also a disappointment. Corporate earnings growth slowed down significantly during the first half of the year; the result of the combined effect of weaker global growth, domestic macro tightening and rising operating costs."

 

The GAM Singapore/Malaysia fund has struggled in 2008.

Whilst over the last three years, according to Trustnet Hong Kong, the fund has generated returns of 56.11%, compared to a return by the Asia Pacific excluding Japan equity benchmark of 44.45% over the same period, over the past year it has slipped into double digit negative performance. The fund has slightly underperformed the benchmark in 2008 with a return of -28.41% year-to-date, compared to a sector YTD of -28.19%.

Writing in GAM’s latest weekly investment notes for professional intermediaries, Chow said:

“The increased commodity price volatility has led us to cut our exposure to soft commodities, especially the plantation sector, from about 10% to 3-4%. Palm oil prices have fallen about 20% in the wake of the oil price falls. Our remaining exposure is focused on palm oil mill manufacturers, who continue to benefit from the high capital expenditures of the upstream players.”

Turning to the fund's exposure in Malaysia in particular, she said:

“As a result of the reduced exposure to the plantation sector, Malaysia now accounts for about 12% of the portfolio. This weighting is concentrated in a number of defensive, high yield stocks with strong competitive positions and robust balance sheets.

“We have added to our holding in Telecom Malaysia, the monopoly fixed-line provider, with resilient cash flows and a strong dividend stream. We are also invested in some deeply undervalued property stocks, such as IGB which trades on a 50% discount to its net asset value and also below book value.

“However, we expect the ongoing political uncertainties in Malaysia to continue to depress value stocks for some time longer. The macro situation is also somewhat unfavourable: unlike in Singapore, inflation has continued to rise due to the cut in fuel subsidies that has led to sharply higher petrol, gas and electricity prices, and significant budget deficits in both 2008 and 2009.”

Turning to the fund’s exposure in Singapore, Chow said:

“In Singapore, we have added to our bank holdings, although at 27% we remain underweight the sector given the index weighting of over 32%. Banks have outperformed the market this year, despite which their valuations remain close to the crisis levels of 2002-03. DBS currently trades at 10x earnings and has an ROE of 12.9%, while UOB and OCBC trade at 11-12x and have an ROE of 13%.

“These valuations should support performance given that the drivers of banks’ earnings growth are better than in the previous downturn – namely the real GDP growth, net interest margins, loan growth, asset quality and the competitive environment. July’s loan growth of 13.9% year-on-year supports our optimism, though performance could be curtailed by further poor newsflow on global banks as well as possible mark-to-market losses."

Chow concluded: “Elsewhere, the oil services sector remains a key overweight in the fund as capital expenditures are set to remain high despite the recent fall in the price of oil. Moreover, both Keppel Corp and Sembcorp Marine will benefit from secure order books and cash flow for many years to come. The fund also retains a high level of cash, at nearly 20%, which we are looking to invest in markets as the right opportunities present themselves.