Julius Baer Sees 25% Gain for Asian Shipbuilders to Steelmakers

Bank Julius Baer & Co. is buying emerging Asian stocks most tied to the global economy for the first time since January, betting steelmakers and shipbuilders will surge 25 percent in the next year as growth rebounds.

The asset manager, which oversees about $336 billion, added cyclical equities in South Korea, China and Taiwan, said Singapore-based head of Asia research Mark Matthews. The strengthening U.S. economy will boost exports from Asia and European growth has been better than expected, while Japan’s output is recovering, he said.

“Put that all together and we get a picture of the major economies in the world getting better,” Matthews said in an interview this week. “Normally we do not like heavy industrials because they are generally very volatile in their earnings and they have booms and busts. However, once in a while there is a reason to own if something positive is happening.”

The MSCI Asia Pacific Industrial Index surged 9.6 percent last quarter, outperforming the broader regional gauge by the most in 3 1/2 years. Growth worldwide will accelerate to 2.9 percent next year from 2 percent in 2013 as expansion in developed nations offsets a slowdown in some emerging economies, strategist forecasts compiled by Bloomberg show.

Julius Baer favors companies in the steel, petrochemical and shipbuilding industries, Matthews said. It sold some U.S. stocks to fund the emerging Asian investments, he said, without naming the companies.
Improving Data

U.S. manufacturing unexpectedly picked up in September to the strongest since April 2011, while euro-area services output expanded more than estimated, data this month showed. Confidence among Japan’s large manufacturers rose last month to the highest since the early stages of the global credit crisis in 2007, while a gauge of services industries in China increased to a six-month high.

South Korea’s Kospi index, on which Samsung Electronics Co. and Hyundai Motor Co. have the heaviest weightings, jumped 12 percent from its low this year on June 25.

Hyundai Heavy Industries Co., the world’s biggest shipbuilder; Posco, Asia’s fourth-biggest steelmaker by output; and chemical maker LG Chem Ltd. are also among the 10 biggest members of the equity benchmark.

South Korean companies have “operations all over the world in sensitive sectors,” said Matthews. “When people think Korea they usually think Samsung phones and Hyundai cars because that’s what we see the most of. But what I’m interested in are more deep cyclical companies like shipbuilders and construction companies.”
Attractive Valuations

Matthews cited inexpensive valuations of Korean shares as another reason for optimism. The Kospi traded at 11.1 times estimated earnings at the last close, compared with about 13.3 for the MSCI Asia Pacific Index and 14.9 for the Standard & Poor’s 500 Index on Oct. 8.

While recent data points to a broad economic recovery, the International Monetary Fund this week cut its global outlook for this year and next. Advanced economies are strengthening, while emerging market economies have slowed, it said, warning that an impasse over the U.S. debt limit may lead to a default that could “seriously damage” the world economy.

“We still have our largest equity exposure in the U.S., which means we still like the U.S.,” Matthews said, referring to client assets the bank helps manage. “But we are watching other regions very closely and particularly Europe, where there seems to be a more meaningful than expected recovery.”
Source: Bloomberg