Thailand Is Back

[jakesideas]

NEW YORK (MarketWatch) - Fund managers are reducing exposure in China and India, where tightening concerns are rising, and investing more assets in Taiwan, Korea, and Thailand, according to Merrill Lynch's latest monthly survey of Pacific Rim fund managers.

"Within the region, the most notable shift is from China to other North Asian markets, as investors anticipate further Chinese tightening measures after the lunar New Year," said Willie Chan, a strategist at Merrill Lynch.

Twenty-three percent of investors said they expected the Chinese economy to get a little weaker over the next 12 months, while 58% expect it to stay the same.

In contrast, Taiwan, a self-governing island which China considers part of its territory, has become the favorite market of managers in the region. A net 25% of fund managers surveyed said they'd increase exposure to Taiwan, up from 21% in January. Taiwan and South Korea both recorded more than $1 billion in foreign net inflows last month. Read more about the Taiwanese market.

"Investors have reduced their preferences in the strong markets of Indonesia and Singapore, and put $620 million into Southeast Asia's big laggard - Thailand," Merrill Lynch said.

Only 3% of managers said they'd reduce exposure to Thailand, down from 21% in January, the survey said.

"Thailand's clumsy implementation of capital controls at the end of last year was a cause of great consternation for investors," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a research note. "Yet it has been quite surprising how well the currency and the asset markets have held up." See story on Thai controls.

The Thai baht is among the strongest currencies this year, rising 3.6% against the U.S. dollar. Foreign investors are likely to be lured back to Thailand by the relatively cheap valuations and interest rates, Chandler said. On Jan 17, the Thai central bank cut its new benchmark one-day rate by 15 basis points to 4.75% in the first rate cut in nearly four years.

Singapore slung

On the negative side, only 15% of investors said they'd increase exposure to Singapore, down from 24% in January. Eleven percent of managers also said they'd reduce exposure in Indonesia, whose capital Jakarta was severely flooded this month; in contrast, in January 3% of managers said they'd increase exposure to the nation. Read more about Indonesian stocks.

India, the region's least favored market, was the only Asian market to record net foreign selling last month, Merrill Lynch said. The firm's economic team expects inflation and tightening in India this year. Last week, the Indian government revised upward to 9.2% its gross domestic product estimate for fiscal year 2007, but analysts have expressed concerns that the growth might not be sustainable. Read about Indian stocks.

A net 5% of fund managers said they planned to increase exposure to frontier markets, like Vietnam and Pakistan, over the next 12 months. Frontier markets tend to be small and illiquid even by emerging market standards.

A third of those surveyed expect the global profit outlook to weaken. Sixty-four percent anticipate higher inflation in the Pacific countries excluding Japan, but only a net 5% think the profit outlook will improve this year in the region.

The Pacific Rim refers to countries located on the edges of the Pacific Ocean, including Australia, Hong Kong, China, India, Indonesia, South Korea, Malaysia, Taiwan, Singapore, the Philippines, Thailand, and New Zealand.

Pacific Rim ex-Japan equities are seen as overvalued, and investors are net overweight cash, but not excessively so, the survey found. Investors shifted their allocation back to cyclical sectors at the expense of telecoms and consumer staples. Banks jumped from an underweight to this month's most favored sector. The energy sector also rebounded from last month's lows, tracking rising oil prices.

Forty-two percent of Japan fund managers believe the country's economy will strengthen, and fewer Japanese investors think inflation will rise over the next year. A net 39% of investors expect Japan's profit outlook to improve. Most investors regard monetary policy as "about right," while they see Japanese stocks as undervalued.