Many are too quick to dismiss the region, he warns, while those who do invest frequently look in the wrong areas. Investors need to look past the consensus views that have grown up around the sector, he adds.
“The first investment advice I received was ‘don’t be a lemming’,” he said.
Here are the three consensus views the manager says investors are wrong to embrace.
1. Developed markets are more attractive at this point in time
Asia, along with the other emerging market regions, boomed in the first few years of this century before the financial crisis hit. After that there was a period of growth as investors fled the indebted West for Asian countries which have younger populations and lower debt burdens.
However, over the past three years money has flowed back into developed markets as optimism about their fundamentals has increased.
Performance of indices over 10yrs
Source: FE Analytics
“We all know the structural drivers in Asia,” King said. “These things are playing out over decades and will continue to play out, but these days people aren’t interested. It’s all about developed markets.”
King says that investors hold up private sector deleveraging as a reason why developed world economies are in better shape, but the true picture isn’t so clear.
Including all the debt from all sectors, there has been no change in the net debt position in western economies, he says.
The manager also points out that as mortgage rates have risen in the US – following the first talk of tapering of QE – there has been a dramatic fall in the number of mortgage applications, which suggests the US market isn’t as ready for rising rates as investors believe.
“[The US economy] isn’t even strong enough to take normalising rates,” he said.
Developed markets are also looking expensive following a strong run, the manager says.
“Relative valuations of Asia to developed markets are at all-time lows, so the recovery is already priced in,” he said. “Valuations are already pricing in that consensus view.”
2. Tapering will hurt Asia
The market sell-off last summer was inspired by then chairman Ben Bernanke raising the possibility of bringing quantitative easing to an end.
Performance of indices in 2013
Source: FE Analytics
However, King says that investors shouldn’t be as concerned as they are by the prospect of that policy change.
“On all fronts, Asia is much stronger than in 1998,” King said.
The manager says that FX reserve coverage is very good while current accounts are in surplus in many countries.
Asian bond yields are at the same levels as they were in 2007 before the financial crisis, while US yields have not yet returned to their previous levels.
He adds that fundamentals are a lot stronger and asset prices have already incorporated the effects of tapering.
3. You should buy north Asia, not south Asia
The ASEAN countries went on a surge in 2011 and 2012, but many investors have been withdrawing their cash recently in favour of north Asia.
Data from FE Analytics shows that relative performance has plummeted in recent months.
Relative performance of indices over 3yrs
Source: FE Analytics
“China is almost a consensus buy for everybody, Korea too,” King said. “South east Asia – such as Indonesia and Malaysia – is underweighted by most.”
“But a lot of that is already reflected in the price: ASEAN markets have already reverted.”
The manager says that on price/book ratios, ASEAN stocks already look good value compared with those from China and Korea.
“Free cash-flow to profits shows you a company’s ability to service debt in times of crisis. Almost all Asian countries have better figures, but the two countries with negative cash-flow to profits are China and Korea,” he said.
“If you worry about tapering, the two countries that would get hit would be China and Korea.”
4. China’s reforms are positive for investors
“A lot of reforms are good for the Chinese economy but not for the stock market,” Fuei Lee continued.
King and co-manager Parbrook have compiled details on which sectors will be aided and hindered by each of the government’s reforms.
In net terms, only insurance and consumer healthcare will be beneficiaries, he says, meaning that 60 per cent of the market is made up of sectors that will suffer.
He points out insurance stocks are on 22.5 times earnings and consumer healthcare is on 27.9 times, meaning that in valuation grounds, investors would be wise to steer clear.
5. You should buy internet stocks
The manager warns valuations of the Chinese internet stocks that have led the market over the last year are far too high.
The market cap of Tencent is equal to that of Swire, Jardine Mathieson and Hutchinson together, while the latter companies have six times the sales and three times the profits after tax of the Chinese giant.
There are also far greater opportunities in Hong Kong property, the manager points out, with many stocks trading at discounts to NAV not seen outside of times of crisis, meaning there is very little downside.
He foresees discounts potentially narrowing from 43 and 41 per cent on his stocks in this area to 10 to 15 per cent when sentiment improves.
