Nick Scott, M&G South East Asia: "Korea is dirt cheap"

FundResesarch: Mr. Scott, Asia is suffering under the high price of oil. Should investors avoid Asia?

Scott: No, definitely not. The high price of oil is, of course, a problem, because most Asian countries are net importers of oil. However, Asian stocks are still favorably valued. Much more favorable than US shares.

FundResesarch: But economists forecast a slowing of the world economy in 2005. What are you doing to address this risk?

Scott: We avoid cyclical stocks that are dependent on the world economy and invest in shares that profit heavily from the strong local Asian economy.

FundResesarch: You buy shares in Australia, China and South Korea. Where do you especially like to invest?

Scott: Each country is different and has its own attractions. But I like India, for example. They have curry there, one of our British national dishes. And they play cricket, a game that I love. But seriously, India has a terrible infrastructure. Yet it has the best companies in Asia.

FundResesarch: Why is that?

Scott: The companies are unbelievably well run. Many of them are already multinational corporations. Look at the Indian software industry, for example. In 1999 everyone thought that it would disappear after the year-2000 problem. Today, no one says that anymore.

FundResesarch: How do you view the government of India? After all, the socialists share power.

Scott: I admit that the result of the election last spring took me by surprise. It also affected the financial markets at first. But the initial shock has subsided. The influence of the coalition partner was overestimated. The Indian stock market has now recuperated its losses. We are overweighted by six percentage points in India - more than any other country in Asia.

FundResesarch: You are therefore underweighted in other countries. For example, Australia and China. Why?

Scott: Australia has a bright outlook. We prefer Asian prospects relative to Australia.

FundResesarch: What about China? You only have eight percent there even though it is represented by 13 percent in the MSCI index.

Scott: People in China are hungry for education and wealth. When you look at it over a period of 20 years, China is a fantastic growth story. But we concentrate on companies. And experience shows that share prices in China cannot keep pace with economic growth.

FundResesarch: Why is that?

Scott: Chinese companies are government owned. There is an issue of national interest versus minority shareholder interests. Also, we do not like manufacturing and industrial companies, as margins are squeezed and there are high shipping costs.

FundResesarch: Back to China. Can the government cool down the explosive growth of the economy?

Scott: The government says: "Stop granting credit!" And the banks follow suit. Even the overheated real estate market in Shanghai is cooling off. These are positive signs. But the south of China is growing considerably faster than eight percent. And foreign corporations such as VW are building factories in China, because they can produce cheaply there. In short, it is too early to tell if there will be a soft landing.

FundResesarch: In which stocks are you investing in China?

Scott: We invest in companies involved in improving the infrastructure. For example, in China Resources, Power, Sinopec, CNOOC and Hong Kong & China Gas.

FundResesarch: To what extent is Hong Kong profiting from China? Mainland Chinese have been able to visit Hong Kong for some time now.

Scott: In Hong Kong you now see many tourists from mainland China shopping at Gucci and Prada. This is quite positive. But Hong Kong should not rely on tourism. Because its economy is service oriented. More and more of these jobs are migrating to Guandong in southern China for cost reasons. We have therefore underweighted Hong Kong.

FundResesarch: Now to South Korea. The stock market is unbelievably cheap. Why are not share prices rising accordingly?

Scott: South Korea is dirt cheap. The 2004 P/E ratio is seven! But there are reasons for this - cyclical market, chaebol structure has low transparency and too much household debt.

FundResesarch: But your biggest single stock in funds is Samsung ...

Scott: ... Correct. The ownership structure of Samsung is very complicated. Because foreign investors simply do not know to whom the company belongs. However, Samsung is number one or two worldwide in many business fields. And with a P/E ratio of nine the share price can only go up.



Profile: Nick Scott (40) joined M&G Investments in 1993 where he serves as Chief Investment Officer (CIO) for Asian stocks. He has managed the M&G South East Asia Fund from Hong Kong since the fund was set up in 1996. Before joining M&G the native Brit worked for Cantrade Investment Management and Morgan Stanley.