BlackRock Asia equity chief backs Philippines as top growth story

By on

BlackRock's head of Asian equities Andrew Swan has reduced his China exposure over the past three months and is backing the Philippines as this year's Asian growth story.

Swan, who runs the BGF Asian Dragon fund, has also reduced his exposure to China over the last quarter although he remains 4% ahead of the benchmark to the country at 29%.

He told Citywire Global: 'We think China is still attractive but a lot of the 'junk' stocks are now up 60% so they are no longer looking cheap.'

While he has been adding to his Indian exposure on the renewed expectation of a more efficiently run and business friendly government, his other major overweight in the region is the Philippines which Swan describes as being in a 'structural sweet spot'.

The country makes up 5% of the fund - almost 4% more than the benchmark index.

'The Philippines now has more stable politics and a government focused on growth. It is seeing a boom in its leisure industry and opening new casinos which are helping to drive consumption and property prices.'

Overall, Swan believes the whole of Asia still looks quite cheap and should enjoy a much stronger year than the last against a backdrop of plentiful liquidity and reduced inflation.

Swan, who took on the underperforming $661 million fund in October 2011, outperformed the benchmark index by almost 7% in 2012 with some punchy bets across a range of lower quality cyclical assets including gaming stocks, steelmakers and container shipping companies.

He reduced the fund to a more concentrated 65 stocks after turning over almost 70% of the portfolio in his first three months.

Swan told Citywire Global: 'The most consistent measure to see if prices are cheap is to look at price to book. When Asia is in crisis it goes to 1 x book but when things are good it gets to 3 x book value. Right now it is at 1.6 x so still looks quite cheap.'

'Over the last two years returns have been poor in Asia because the central banks were tightening and as a result economic growth slowed down. Earnings per share forecasts have come down 20% to help drive inflation out and with inflation out of the system and abundant liquidity we don't think Asia is a re-rating story but a growth story.'

'Equities tend to lead turns in the cycle. In 2009 earnings were still being downgraded when equity prices had started to go up. It is not quite like 2009 but we think the cycle is turning positive with industrial numbers picking up across Asia.'

Top stocks

Among his biggest bets away from the consensus was an overweight to Macau gaming stocks and Chinese property which were unloved in late 2011.

'We are pragmatic investors as we believe that when markets are volatile you get mispricing opportunities. In 2012 half our performance came from  junk stocks such as steel companies and container ship companies which we would not want to own long term.'

'We added Macau gaming stocks which doubled in share price and which still are fantastic for investment potential. They have run hard but the long term growth still looks good.'

'In late 2011 we had significant exposure to Chinese property and took the view that the government would not let the sector fail. Many of these stocks went up 100 to 150% when people realised the sector would not implode and while we sold while the market was still rising, we don't think there is much upside left for them in the cycle.'

The fund's other significant overweights are financials and industrials, although Swan remains underweight banks, with Haitong Securities, Agricultural Bank of China and China Pacific Insurance his largest overweight positions.

He remains under exposed to defensive sectors such as consumer staples, telcos and utilities.

Over five years to the end of January, the fund has returned 1.4% compared to the MSCI Asia ex Japan return of 18.7%, although over the 16 months since Swan took over the fund, it has returned 35.2% compared to the index's 28.9%.

The five-year performance doesn't look too good...

Please visit our full site to view this interactive chart

...But things look better since Swan arrived

Please visit our full site to view this interactive chart