MONEY managers see the Asia-Pacific ex-Japan (APac) region as having the greatest upside potential for equity investors this year, after Europe, according to a recent survey by Credit Suisse.

India, China (A shares) and Japan — in that order — were the Asian markets they most liked, while Australia, Pakistan and Malaysia were their least preferred.

Credit Suisse polled attendees of its annual Asian Investment Conference (AIC) in Hong Kong last month, which included representatives from 300 corporates and more than 1,200 institutional investors, hedge funds and high net worth individuals that collectively manage over US$18 trillion (about RM65.9 trillion) in assets. They were asked for their views on the markets and how they are positioned.

The results of the 2015 sentiment survey, which Credit Suisse released last week, showed that while fund managers had a clear preference for Europe for the second straight year, they also had an improving view of APac. Of those polled, 45% believe that Europe will be the best-performing equity market in 2015, followed by 23% for APac and 16% for the US.

Around 70% of those polled were of the view that the MSCI Asia Pacific Index would be up by between 10% and 20% this year.

Interestingly, this is the first time in four years that investors have higher expectations of equities in APac than the US, says Ali Naqvi, Credit Suisse’s head of equities for Asia-Pacific.

“People think APac will do well relative to the US. To us, we think the US is fully valued. Monetary tightening is going to happen — it’s only a matter of time — and therefore, the market is not as attractive. As for Asia, it’s been an ‘under-own’ for three years, in emerging markets especially, and that’s why we think it can do better.

“Europe, to us, is a trading buy as it is under-owned also, and with quantitative easing coming through, liquidity will be better. We also think the GDP has started to improve,” he tells The Edge in an interview on the sidelines of the AIC, which was held in the final week of March.

Credit Suisse’s view is that the US Federal Reserve will start raising interest rates in June or September this year.

Ali says there are several reasons why Asia topped the US this year in the sentiment survey.

“The first one is that the US market itself has done very well, and so the valuations actually look expensive. The second is that for the first time in Asia, you have three large economies — Japan, India and China — each having a strong story,” he says.

He goes on to explain that Japan, while “not perfect”, is gradually improving and corporate earnings there are among the best in any region. And in India, post-elections, there is a structural growth story, with potential for the economy to grow much faster over the next three to five years under the new government.

In China, the issue over the last four years has always been whether the economy is headed for a hard or soft landing, says Ali. “This year, I think the only change which has happened is that the probability of a hard landing has gone down … the comfort has come in that it (the economy) is not going to implode. That relative change is positive, because China has been quite under-owned, and is still quite under-owned. Also, there’s a lot of pro-market structural reforms in China that have started to come through.

“So, from Asia, you have those three markets, having at least a neutral-to-positive momentum at the same time. And they are under-owned,” he explains.

Credit Suisse is of the view that equities will be the best-performing asset class this year. Ali is “cautiously optimistic” about the prospects of APac markets and believes the MSCI Asia Pacific Index could be up by between 10% and 15% this year.

“What I mean by cautiously optimistic is that you will have within these next nine months a period where equities could go down by 10%. But I think by the end of the year, they’ll still be up 10%. So, we should be ready for some volatility, mainly because we will have these global changes coming through.”

In the survey, geopolitical issues were highlighted as the biggest risk (27% of the votes) to the markets, followed closely by tightening monetary policy (24%) and China’s growth and credit-related risks (18%). It is worth noting that investors’ China-related concerns were nowhere as prominent as in the previous year’s survey.

Just over half of the respondents expect oil (WTI) to trade between US$50 and US$80 a barrel by year-end, while 45% expect it to be between US$25 and US$50.

“To me, geopolitical risks are probably the biggest global risk, but I think that for Asia, maybe it’s not as high as, say, Europe. The second risk is monetary tightening because if it comes through, money can leave emerging markets, including Asia, very quickly — whether there is value or not.

“And the third risk is if China’s reforms fail … meaning that the credit issue becomes a much bigger (problem), or that they are not able to restructure the economy successfully. And if China comes down, then the whole region and world comes down because China is still the main driver for growth even after (factoring in) a slowdown. As for oil, even if the price goes from US$40 (a barrel) to US$60, that’s not such a big game changer. For Malaysia, it will be a positive obviously, but not really for the rest,” Ali opines.

His expectations of the sectors that will do well this year pretty much mirror that of the other money managers. In the survey, technology was a clear favourite, followed by consumer discretionary and healthcare.

The energy and materials sectors were, by a large margin, the least liked sectors.

“Technology has been the favourite. We’re a little bit more cautious on the technology hardware side because we think it’s on a cyclical downturn. But we like the technology software side … the Indian companies and some of the other software companies.

“Consumer discretionary we still like, as there’s certainty of earnings coming through. We like healthcare still, but we still don’t like materials or energy. Financials, we’re in the middle — I think China financials are very under-owned, so we like them, we prefer them,” says Ali.

Asked about trends in fund flows, he notes that in the last one year, most of the funds have flowed into India and Japan. “China has started to attract a little bit, not a lot,” he says, adding that in the rest of Asia, it has been mostly domestic institutional funds that have supported the markets.

In the previous year’s poll of AIC participants, almost a quarter of the respondents had expected Asian equities to be flat that year. They turned out to be right, as the MSCI Asia Pacific Index had a mere 2% gain in 2014.

The participants of the 2014 survey were also correct in identifying India and Indonesia as likely strong performers, and Australia and Malaysia as among the worst.

They were, however, wrong in predicting that Europe would be the region likely to provide the greatest upside for equity investors as the Stoxx 50 had, in fact, shed 11% in 2014 in US dollar terms.

Ali explains that Malaysia continues to be a market that money managers remain underweight on, mainly because valuations are relatively more expensive.

“And in Malaysia, we can’t see a lot of catalysts for the market to support. A lot of people were ‘playing’ the (proposed) mega bank merger (between CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd), but that didn’t happen unfortunately, otherwise the market could have become more interesting. It’s things like that, where people can see that there’s some activity coming from economic policy, corporate activity or corporate restructuring, which allow (funds) to come in,” he remarks.

This article first appeared in Capital, The Edge Malaysia Weekly, on April 6 - 12, 2015.

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