Global observers pick fourth-quarter US economic recovery

Friday 12th April 2002

Two Hong Kong-based directors of Global Asset Management (GAM) - Josephine Shaw and Raymond Lee - recently made a flying visit to New Zealand to update people on the locally offered hedge fund they manage, the Tower GAM Multi Trading Fund.

GAM is an international company which selects and manages sub-contracting fund managers and bundles up their investment products into portfolio offerings like GAM Multi Trading. Ms Shaw in particular is responsible for choosing the hedge funds included in the Tower product.

It was worthwhile hearing views on the outlook they have for the markets. GAM offers hedge, equity, and fixed interest funds and therefore keeps a watching brief across a wide range of investment classes.

The GAM view of when a US economic recovery will kick in is less sanguine than some commentators. The consensus has emerged that the US rebound is under way because of stronger than expected March statistics, but GAM is picking that there will be false rallies in economic data and that the upturn will probably not take place until the fourth quarter of this year.

Another GAM concern is that US equities still look over-priced on measures such as P/E. Ms Shaw said GAM was not expecting a broad sharemarket rally or even sectoral uplift. Individual stock-picking would be the order of the day.This vioew implies fund-manager skill will come to the fore in driving investment returns for 2002-3. Mid-cap stocks are tipped to offer better opportunities than large caps.

As Ms Shaw put it, GAM does not expect equity markets to go "ballistic" on economic rebound. Upturn for stocks will be fairly modest in her view.

Regionally, the GAM directors point to emerging markets as the place to put aggressive money because of the leveraged effect on these economies of US recovery. But it will not all be plain sailing, according to the pair.

They singled out the likes of Indonesia and Malaysia as economies that had managed to scare investors away. South Korea looked like a good bet, and Taiwan and Singapore should turn around, with modest improvement also for Hong Kong. But the semi-conductor exports that many emerging markets rely on could be squeezed on price, especially as China comes on stream as a big player.

Ms Shaw looks after high- net-worth clients in Hong Kong and commented that many were selling off their bonds in expectation of a US interest rate hike. She also picked a weaker US dollar going forward and a firmer kiwi dollar. As a consequence she was going to lift her hedging ratio on the kiwi. The direction in which the Reserve Bank was going, with increasing the official cash rate, implied a stronger kiwi, taking into consideration high real returns here versus interest rate investments in many other countries.

So far as hedge funds go, Ms Shaw had observed a huge influx of investor funds over the past couple of years as the equities bear market unfolded. Most hedge funds they select close off to new investment at about $US200-250 million. Above that they tend to get unwieldy. But one launched at the end of July, 2001, GAM Trading III, pulled in $US800 million in just six weeks before it closed. A lot of money is washing around looking for a home in hedge funds.

Where investing in already closed hedge funds is concerned, Ms Shaw explained that she manages portfolios with strict percentage allocations in various funds. If a closed hedge fund in a portfolio exceeds allocation due to increase in value relative to other funds included, then the excess is cashed up and re-allocated.

There is a queuing system for putting new investors into the closed funds that become available as re-allocation takes place. Ways to get up the queue include length of time of association with GAM and the size of the investing account.

Ms Shaw likes to take a cautious approach to putting clients into hedge funds. Some clients see high historical returns for some GAM products and want to put all their money into them. However, Ms Shaw cautioned against over-investment and lack of diversification. She warned people not to get too greedy. Past performance did not guarantee future performance.

However, she observed, many of her clients had lost so much money on the equities bear market and the Hong Kong property slump that they had lowered their expectations to wanting regular positive returns.

The pair offered some comment on Hong Kong's fairly recently introduced compulsory savings scheme for employees. GAM is one of the three approved service providers that Hong Kong employees can choose from. The employer subsidy cap is too low at $HK2000 per annum, Mr Lee said. Another problem was the tax base in Hong Kong, which was too narrow. Many employees were missed by the scheme, Ms Shaw said, because they worked for companies with fewer than 10 employees and were outside the tax net.

Looking ahead, both GAM directors said Hong Kong had some serious problems to address about funding welfare and would need to examine ways to spread out the tax base more widely than is applicable now.

They were surprised at high tax rates here.

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