The global reallocation to emerging markets continues to favour the Asian region. International investors expect an improvement in the global economy in 1999 and 2000 and see the Asian region as the most successful way of investing in this growth. Asset allocation has continued to favour the smaller markets in absolute terms. This has backfired on fund managers to some extent as thin trading has caused negative performance. This is particularly the case in Thailand, which had been picked by quite a few managers as a market to watch in the third quarter. Hong Kong had lagged the region earlier in the year, but sentiment has now improved. An element of caution remains, however, over the prospects for Hong Kong and China based upon a potential devaluation of the yuan if deflationary pressures persist. It is looking more likely that devaluation will occur at some stage in 2000, though investors should not underestimate the ability of the Chinese to manage this transition.
Alfred Ho, manager of the Invesco Asian Enterprise Fund, suggests the markets may now consolidate based upon the amount of new issuance, which is impacting upon liquidity and the technically overbought position of many of the markets. He believes the global picture is more supportive, as Japan appears to be recovering, Europe has signs of strength and the US has remained strong. The Chinese market is also a concern as devaluation is back on the agenda. Ho sees devaluation as inevitable, given the failure of the Chinese to revive the economy. They have tried to adopt the Japanese model, he argues, and have clearly failed. To retain their competitiveness they will devalue, but the market is beginning to discount this event and the contagion effect will be limited.
He continues to adopt a stock-specific approach to portfolio construction, but has been trimming some of the more aggressive bets in both Korea and Singapore, where the favourable liquidity cycles have now ended. The degree of domestic participation in these two markets also suggests that they are reaching their highs. The market of choice has been Hong Kong, where the manager sees the consensus view as being bearish. Given his positive view of global growth, he has been keen to accumulate cyclical stocks, which are mostly Chinese in origin, in sectors such as petrochemicals and steels. The overweight position in Indonesia has also been reduced, as the liquidity cycle appears to be close to a cyclical low.
The major risks to further progress include too much strength in the equity markets, which breeds complacency with regard to corporate restructuring, a further weakening in Japan or significant interest rate rises in the US. There is optimism though that – if global markets do not suffer any lasting damage from Y2K fears or pronouncements on this and other matters by US Federal Reserve chairman Alan Greenspan – the markets of the Asian region could move ahead quite smoothly in 2000.
Richard Newell is a diirector of Forsyth Partners in Croydon
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