Average valuations in Asia-Pacific have been at 1.5x-1.8x price-to-book ratio since about 2009, according to Ho.
In May, the team found the average valuation near the upper band and proceeded to cash out the 2% of equity holdings.
“Toward the end of May, we found equity prices reached the top-end of the trading range while earnings revisions for the companies [in Asia-Pacific] have become less positive. We had more downward revisions than upward for equity holdings,” Ho told FSA.
Most of the equity trimming was Australian banks, which became a slightly underweight position versus the benchmark.
The major reason for the sale was that the Australian bank sector faces downward pressure due to government investigations over misconduct.
Total equity holdings were reduced to a high-50% level from the 62% level at the end of May.
She noted the fund can allocate a maximum of 75% of assets to either bonds or equities and must hold a minimum of 25% in each asset class.
Apac real estate
Within equities, the portfolio holds an overweight position in real estate-related companies and banks in Hong Kong and Singapore.
In terms of country, Singapore is the biggest overweight. “The fund allocation to Singapore gives the flavour of how the whole portfolio is structured. There is an 8% weighting compared to the benchmark, which breaks down into 4% banks and another 4% in REITs,” she said.
She believes the economic cycle in emerging markets is at the middle point. That said, with the unfolding global trade conflict, the cycle is potentially shortened.
Because the economies are phasing into a later stage of the economic cycle, it is typical for the financial sector to outperform the broader market due to an improved net interest margin for banks, driven by interest rate hikes in response to inflation pressure, she explained.
“It is already happening among banks in Singapore. We see their net interest margin start to expand. Loan growth is quite decent. For the financial sector, not only are the valuations reasonable, but we also see a trend of fundamentals continuing to improve.”
In the real estate sector, the fund invests primarily in Singapore’s REITs and Hong Kong’s property conglomerates.
“The rent cycle for offices in Singapore is beginning to slightly turn to the better side, with the valuation lagging two-to-three years, making the sector as a whole more attractive on a relative basis,” she said.
She estimates the average dividend of 5-6% given out by the REIT remains sustainable as the rental vacancy rates continue to come down.
Evaluating real estate stocks in Hong Kong, Ho finds Sun Hung Kai Properties and Wharf Real Estate Investment attractive because the market tends to categorise them as cyclical stocks while overlooking the stable income from rental businesses.
“Over 50% of the assets and cash flow [at Sun Hung Kai] comes from the rental and investment property portfolio, which generates the company a stable income.”
Wharf REIC, a commercial property spin-off from Wharf Group, runs two large-scale shopping malls in Hong Kong, Harbour City and Times Square.
Therefore, she said the rental cash flow stream gives visibility to their revenue more than other property developers and cyclical stocks as a whole.