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Banks and property: unloved here but worth a look in Asia

Leonora Walters
By Leonora Walters  13-May-2009

Financials have been out of favour in western economies but are ‘the opportunity in Asia,’ according to Henderson’s Mike Kerley, while property – another unloved asset – looks promising.

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Reasons for favouring financials in this region include the fact that they are still liquid and can lend to consumers, according to Mike Kerley, fund manager of the Henderson Far East Income investment trust. Meanwhile, the average debt level among Asian consumers is low so loan growth in the region is possible.

Banks have maintained a prudent policy focusing on sustainable lending, so that the average loan to deposit ratio for institutions in the region is around 80 per cent. They are also taking advantage of the fact western banks are constrained in their lending and using the opportunity to expand their balance sheets.
In Singapore, for example, foreign banks had 30-40 per cent market share and have now withdrawn. This means Asian banks attractive to both income and growth investors: Andy Beal who runs the Henderson TR Pacific Investment Trust, which is focused on growth, believes Asian banks should emerge well from the current recession.

Local banks are benefiting and doing well in areas such as trade financing as well as being able to make loans at higher margins, for example at around 300bp in March, in contrast to 50bp-100bp previously. In addition companies unable to finance in the credit markets are turning to banks for loans.

Although, the share prices of banks in this region have fallen considerably, trading below levels where they were during they Asian crisis, Beal considers that they are well capitalised with tier 1 capital on average of 10 to 12 per cent, while UK banks typically have tier 1 capital at low single digit levels. Asian banks also have little or no exposure to wholesale credit markets due to the fact they finance themselves via deposits. 

Henderson TR Pacific Investment Trust
 added to both financials and property in late 2008, in particular in China. Top ten holdings as of 31 March include China Industrial and Commercial Bank of China accounting for 7.1 per cent of assets and Bank of China - 3.3 per cent of assets.

Henderson TR Pacific has 47.6 per cent of its assets in financials.

Meanwhile the Hexam Global Emerging Markets fund which holds China as its third largest top active geographical allocation – 5.2 per cent of assets as of April – favours sectors in this country including banks, cement and property. The fund’s third largest holding is Industrial & Commercial Bank of China accounting for 3.5 per cent of holdings.

Top ten holdings in Henderson Far East Income include Bank of China, 4.9 per cent of assets and DBS Group Holdings, 3.6 per cent of holdings.

Mike Kerley But Kerley (pictured left) avoids Korean banks as these have an average loan to deposit ratio of 140 per cent and need overseas borrowing. While they are not as cash strapped as many western banks they need to raise funds and are suffering as exports fall. The trust’s weighting to Korea has fallen as a result of the avoidance of these banks, and now stands at just over 5 per cent. But less exposure to Korea has resulted in lower income.

Other areas being avoided include Australia and India.

Kerley said Indian stocks are typically twice the price of their Chinese counterparts. Indian companies are often owned by family groups as oppose to the government in China, which is more amenable to publicly listing good companies.

Property stocks, meanwhile, also look attractive and are benefiting from a low interest rate environment, for example 1.25 per cent in Hong Kong, says Kerley. Promising areas include Hong Kong, Taiwan and in particular China.

Henderson Far East Income had a weighting of about 17 per cent to this sector as of 30 April.

He noted that Hong Kong property prices are below 1997 levels making property affordable, while economies in the region continue to grow and consumers have high levels of savings which could result in a positive asset boom in the next three years. This could also be encouraged by government economic stimulation. 

Kerley said: “Return on property investment will be very compelling and now is a terrific opportunity to buy these stocks at current prices. Top ten holdings include Hong Kong property developers Sino Land, 3.6 per cent of the trust’s assets as at 30 April, and Henderson Land Development accounting for 2.7 per cent.

Although these offer low payouts the shares were so cheap at time of purchase they yielded around 5 per cent, though this has now fallen to 4 per cent following an increase in the share price. But this still compares well to Hong Kong bonds which only yield around 1 per cent.

Shenzhen Investment, 2.7 per cent of assets, is a developer owned by the Chinese state. When the fund bought into this the stock it yielded around 9 per cent though it now offers about 4 per cent as its share price has doubled. 

Christopher Lees, manager of the Dublin domiciled JO Hambro Global Select fund, said there are attractive real estate companies across the globe whose share prices have suffered, and Japan is particularly interesting.

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