Writing in GAM’s latest weekly investment notes for professional intermedaries, Lai said: “We factored in higher inflation at the beginning of the year by shifting our attention to countries like China, which have been running fiscal and current account surpluses, and away from countries like Indonesia, the Philippines and Thailand, which have been running fiscal and current account deficits.
"The indiscriminate nature of the recent sell-off is particularly surprising – markets across the whole of Asia are down as much as -6% just this month."
Lai is investment director for GAM’s Asia Equity, Asia Equity Hedge, Star Asian Equity, Star Asia–Pacific Equity, Asia–Pacific Equity, Star China Equity, and Greater China Equity Hedge funds.
He continued: “Generally speaking, we have been reasonably happy with the swiftness of the region's governments' responses to the inflation threat. When oil approached USD 140–a–barrel, policymakers across the region moved quickly to cut back fuel and food subsidies, with negligible political fallout so far.
“Another encouraging sign is that Indonesia has just issued a sovereign bond at around 340 basis points over Treasuries. Asian bond markets as a whole are currently trading around 250–260 basis points over Treasuries, which is approximately what they were at the beginning of the year. There has clearly not been a major blowout in fixed income, which implies that bond investors still view the region positively."
Lai said that equity investors remain bearish, with the result that value is beginning to emerge. He cites the fact JP Morgan predicts that companies included in the MSCI China index will trade at just 14x this year’s earnings and 12x next year’s, and will achieve 20% earnings growth over the next two years.
Turning to interest rates in the region, he said: “Real interest rates in the region are negative – on average, they are around -1.7%. It is clear that the monetary stance is far too loose and needs tightening, which will have an impact on domestic demand.
“The reason we continue to favour China over other Asian countries is that China has been tightening its monetary policy for more than 12 months and is already about 65% of the way through its tightening phase. By contrast, economies like India, Indonesia and the Philippines are only at the beginning of their tightening phase.”
Vietnam is viewed by Lai in a critical light:
“In the space of 18 months, Vietnam has gone from being Asia’s poster child to its problem child,” Lai said.
“The Vietnamese government adopted a very loose credit policy to stimulate its economy in an attempt to catch up with its Asean neighbours, resulting in money supply growth of 25%.
“Some people have viewed Vietnam as a bellweather for what could happen across the rest of Asia, but this view fails to recognise the significant policy differences between Vietnam and other countries in the region.
"For example, money supply growth has averaged around 10–12% for the rest of Asia, with China being the exception at around 15%. However, the Chinese authorities have already recognised this and for the past twelve months have been tightening the bank reserve requirement ratio, which is now at around 17.5%."
He warns: “It is very easy to tar all Asian economies with the same brush without really understanding the idiosyncrasies of each individual economy, but I think that this is the wrong approach."
Turning to GAM’s Asian preferences, he said: “We continue to favour Asian financials. The sector has been sold off along with all the other cyclical sectors in the region, but we believe its fundamentals remain sound. We also continue to favour the real estate sector in Hong Kong due to the prevailing negative real interest rates and have been committing more capital to it."
And, turning to GAM’s Asian Equity Hedge fund in particular, he said “We have been running a net long position of around 69%. The sell-off was initially indiscriminate and there was no place to hide, but differentiation is slowly beginning to reappear. The short book is working and we find that the long book is beginning to work as well.”