Fund managers dump IT stocks for producers of raw materials

Fund managers dump IT stocks for producers of raw materials

New York: Edward Hocknell withstood last month’s decline in equities prices because he owned Angang Steel Co. Ltd, which is among companies that sell raw materials in China and India. Hocknell sold Infosys Technologies Ltd, which depends on the US and Europe.

Hocknell and 99 other emerging market fund managers have raised their combined holdings in raw material stocks to the highest percentage of assets in almost three years. They’ve cut information technology holdings to the smallest percentage in five years, according to Emerging Portfolio Fund Research Inc. (EPFR) as of 31 August. Investors are seeking to take advantage of what Morgan Stanley calls an “emerging market-led" global economy.

“Why would you want a company that’s servicing the Western consumer?" said Hocknell, whose $316 million (Rs1,254.52 crore) RS Emerging Markets Fund has outperformed 85% of its peers this year. “In the new world that we seem to be entering, what’s really defensive? Probably what we like to call the ‘dirty and smellys’—the mining and industrial stocks."

China’s Angang Steel, which gets 75% of its sales at home, has gained 164% this year. Bangalore-based Infosys, India’s second largest computer services provider, generates 90% of its sales in the US and Europe. The firm’s shares, at Rs1,896.75, have erased almost one-sixth of their value through September.

Hocknell, 46, who manages the equivalent of $9 billion in emerging market stocks at Baillie Gifford Overseas Ltd in Edinburgh, also sold Taiwan’s High Tech Computer Corp. during the second quarter. The company, which gets more than 83% of its revenue from the developed world, had a stable stock, which was unchanged this year after falling 18% from 25 July to 16 August.

After the transactions, 12% of Hocknell’s fund was invested in raw material producers and 5.7% in technology stocks. Hocknell declined to specify his investments since 30 June —the most recent quarterly disclosure. The fund has returned 9.7% since then, beating the 8.3% gain for the Morgan Stanley Capital International Emerging Markets Index (MSCI). Over three years, the fund has gained 184%, as against the MSCI index’s 164%.

Hocknell and fund managers at Templeton Asset Management Ltd, American International Group Inc. (AIG) Investments and Morley Fund Management, who together manage $63 billion in emerging market stocks, are bidding shares of raw material producers to new highs.

A year ago, 100 emerging market funds tracked by Boston-based EPFR had 14.2% of their holdings in information technology shares and 9.3% in raw materials producers. By August-end, they increased holdings of materials firms to 13.9%—the most since October 2004, while reducing infotech holdings to 10.5%—the lowest since at least 2002.

Merrill Lynch & Co. Ltd estimates developing countries in Asia, West Asia, eastern Europe, Latin America and Africa will spend $1.25 trillion on roads, airports and other infrastructure projects in the next three years. Governments are trying to maintain economic growth without allowing transportation and supply delays to trigger inflation.

MSCI indexes for industrial and materials stocks have had the biggest gains among 10 groups this year in emerging markets, advancing 68% and 64%. The index of information technology shares rose 7.4%—the least.

Antoine Van Agtmael, chairman of Emerging Markets Management Llc. in Arlington, Virginia, disagreed with Hocknell’s view, and said he prefers technology stocks, such as Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co., because their 4% decline this year makes them cheap. The MSCI emerging market index of information technology shares trades at 17.22 times trailing earnings, compared with 22.84 on 2 January.

“After a sharp drop, the semiconductor cycle is on an upswing again," said Van Agtmael, who manages $20 billion in emerging market stocks. The impact a slowing US economy on raw material demand is underestimated, he added.

Jonathan Garner, emerging market strategist at Morgan Stanley in London, said software producers will be hurt the most by the subprime crisis, as financial firms spend less on outsourcing. “This is a permanent shift in global economic leadership," he said.

Emerging markets will add about half of the world’s $3.4 trillion of gross domestic product growth this year— triple the contribution of the US, according to April projections by the International Monetary Fund. “All these crises in the ‘80s, and particularly in the ‘90s, tended to start in emerging markets," Hocknell said. “It’s a sign of where the world has gone that this time it started in America."