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'Domestic consumption needs to fill the gap left by exports'

INTERVIEW: Maike Currie talks to Alistair Thompson about the prospects for investing in the Asia Pacific (ex Japan) region

Much has been said and written about the Asian financial crisis which ravaged the continent’s burgeoning economies more than 10 years ago. While the crisis might have left some ugly scars, Alistair Thompson, manager of the First State Asia Pacific Leaders Fund, believes the severity of the Asian crisis helped to ensure that the excesses of the West were not repeated in the East.

"Generally Asia is at a very different stage of the credit cycle – you just need to look at banks' leveraging here relative to the rest of the world. Measures such as loans-to-equity show German banks to be 55 times leveraged, UK banks 44 times and Swedish banks more than 30 times leveraged. In contrast, bank leverage in places like Hong Kong and Singapore is only 10 times. These regions also boast loans to deposit ratios of 70 per cent – much lower than in the West," says Mr Thompson.

But while Asian financials look relatively healthy compared to their Western counterparts, and benefit from high savings rates – Singaporeans for example save up to half of their income - the region remains highly leveraged to global trade.

"This remains a major concern," says Mr Thompson, pointing to figures which show 2,000 toy factories closing down in Guangzhou, an industrial province in China, with more than 20 million factory workers made redundant.

"Exports account for 30 per cent of China’s gross domestic profit (GDP), 45 per cent of Korea's GDP, 70 per cent in Malaysia and in Singapore and Hong Kong well over 100 per cent, given the amount of re-exports going through these countries.

"If Asia is to emerge from the recession first depends heavily on whether domestic consumption can fill the gap left by exports."

Domestic consumption, according to Mr Thompson, is really the 'flavour' of the Asia Pacific Leaders Fund. On the back of this close to 55 per cent of First State’s regional funds invest in so-called 'consumer related' stocks which include consumer staples, consumer discretionary, telecoms, pharmaceuticals and a few financials which have a consumer slant.

Mr Thompson, who manages the fund alongside Asia Pacific veteran Angus Tulloch says these stocks are favoured because they tend to be less cyclical in nature while boasting strong franchises and brands with resilient earnings. "We look for sustainable, physical earnings growth in companies, and we also pay very close attention to valuations – we don’t like overpaying for a company and as such we will probably buy a company too early and sell it too early as a general rule."

Companies which fit the fund’s remit are found by employing a rigorous bottom-up stock selection process and while factors such as corporate governance, government intervention and accounting practises remain a worry when investing in emerging economies, First State managers navigate these issues by making one-on-one contact with companies. "Last year we conducted 1,008 company visits in the Asia Pacific and Global Emerging markets sector. The key is to look management in the eye and determine whether they will be good stewards of clients' money," says Mr Thompson. "We’re buying management teams and corporate culture but ultimately it is about whether the company we are buying into is well priced relative to the risks attached."


Alistair Thompson joined First State's Asia Pacific (ex-Japan)/Global Emerging Markets team in January 2003 in the role of senior portfolio manager for Asia Pacific equities. Following the merger of the Edinburgh-based Asia Pacific team with the Hong Kong and Singapore Asian teams in September 2003, Mr Thompson took on the role of deputy head of Asia Pacific (ex-Japan) and relocated to Singapore in December 2003.

He joined First State from Edinburgh Fund Managers where he worked for nine years and was head of Asia Pacific (ex Japan) and portfolio manager for a range of open ended funds and a leading investment trust. Prior to joining Edinburgh Fund Managers, he worked for CIM Fund Managers where he started managing their money market funds and their Asian funds, having joined the firm in 1989.

Mr Thompson holds a diploma in fund management from the Securities Institute of London.

First State's robust stock selection process coupled with an absolute return investment philosophy has benefited the fund's performance, with Asia Pacific Leaders more than doubling investors' money over the last five years.

Mr Thompson and Mr Tulloch are also strong conviction-based investors, and on this basis hold a significant weighting in two gold companies - Lihir Gold and Newcrest Mining - both featuring in the fund's top 10 holdings.

"Politicians can't print gold and given that we are in uncharted waters with quantitative easing and the sheer level of government debt - the US government debt is as big as it was during the Second World War so in effect we are funding a second world war here – and it is going to ask a lot of bond markets, with inflation a very likely scenario.

"In this context gold is the ultimate portfolio insurance."

While most investors will view these issues as problems of the Western world, Mr Thompson makes the point that most Asian governments don't want their currencies to appreciate and countries like China actively buy more US treasuries and print more renminibi in order to suppress the value of their currency. "In a way this is the flip side of the quantitative easing equation which makes gold an even more attractive investment."

Making no attempt to smooth over the risks that go along with investing in region (although he says he could argue that other areas are more risky), Mr Thompson remains positive on the outlook for Asia. Given the strong dividend culture in these companies - which is only getting stronger – and the resilience of domestic consumption, it seems the scars of Asia look set to heal.