Sound over longer term
It has been one of the many ironies of the slump in global equity markets that Asia has been perceived as a relatively safe haven. Now, with major markets again showing signs of exuberance, the relative fundamental strength of the Asian economies has investment managers suggesting that Asia equities could be carried along on a wave of positive momentum. This has already happened in the first half of 2003 but perhaps more is to come. As an example of current fund manager thinking, James Alexandroff of Singapore-based Arisaig Partners says “we have been reassessing target valuations across the portfolios. It seems to us that there is considerable scope for re-rating. The current backdrop of abundant global liquidity also suggests that stocks may overshoot beyond historical trading ranges.”
A halt in the short term would not be too surprising though. According to Hamon Asset Management’s Hugh Simon, following the liquidity driven rise of 17.9% in the second quarter, “we expect major blue chips in the region to consolidate in the near term, as investors need to see clearer signs of earnings improvement before committing their new money into the markets. Also, the second-quarter earnings results are unlikely to excite the markets, as they could be affected by the temporary negative impact of the SARS outbreak. However, we are excited by the bottom up opportunities.”
Asian countries have been benefiting from positive investment inflows because of their increasingly strong manufacturing position, with exports having remained relatively resilient to the global downturn. Having taken their pain earlier than the developed economies, Asian countries have restructured and are well-placed to benefit from the eventual pick-up in global consumption. The situation has been helped by healthy domestic consumption.
Mark Breedon, investment manager at Investec comments: “We believe that the Asian region will be the major beneficiary of an upturn in world economic growth which we expect over the latter part of the year. We are positioned for a revival in investor interest in technology and more economically sensitive issues while maintaining a strong representation in the Chinese market which we feel offers great growth potential. We continue to believe that the Asian region offers a compelling combination of new, high growth, markets, strong demographic trends, human skills and work ethic in an environment that is becoming increasingly liberalised.”
This is all very well, but as many investors will know to their cost, the Asian markets promised much during the 90s but delivered little except a series of boom and bust scenarios. For the institutional investor, the long term argument for investing in Asia remains sound. Over a 15 year period, the investment return from emerging countries has been good. It is only over shorter periods where the disappointments occur. In this context, investors need to recognise the significance of event risk, market cycles and timing as the key factors.
China has been the focus for much of the foreign direct investment. Its economic dynamism is based on a vast supply of cheap labour and cheap capital. This has resulted in a deflationary trend that has forced all Asian producers to cut costs faster than prices fall. As a result Asia, and not just China, is likely to become the hyper competitive exporter of the global markets.
Jerome Booth, head of research at emerging debt managers Ashmore says Asia as a whole is in good shape, with growth expectations being met and attractive investment opportunities across the region. There will be a slowing down in certain countries, he says, such as Korea and Singapore. Korea led the cycle and this time last year was the leading stock market of the world. China is pushing through and doesn’t appear to be a stopping, says Booth. In the short term, fund managers say China is unlikely to produce the sort of growth investors have been getting used to in the last two years. But over the longer term, they all seems to agree it remains the best growth story in the region, if not the world. SARS, it seems, has not been the disaster it threatened to be. Booth says “SARS has been a one-quarter event that has damaged confidence in certain areas, particularly Hong Kong. This is now coming through in the data.”
ING Barings Asian manager Kate Munday is encouraged by the fundamental backdrop for Asian markets: “Robust domestic demand drivers, cost competitiveness and reform driven change, combined with low valuations, suggest the asset class should be well under-pinned at current levels.”
Arisaig meanwhile, is continuing to forage for new ideas in largely uncharted terrain. Alexandroff says, “Our investments in Sri Lanka have had a stellar 12 months; we have made our first stock purchase in Mauritius; and Vietnam beckons in July.”
Despite the really in global equity markets during June, emerging market bond fund managers continued to attract money. Ashmore concentrates on opportunities in the corporate restructuring that is taking place across the region. Currently, the firm is finding the most exciting opportunities in Malaysia, Indonesia, the Philippines and Thailand. Booth expects Korea to have a second wave of restructuring soon and non-performing loans in China are expected to be a huge market.
External factors such as the course of interest rates, oil and commodity prices will have an effect on Asian markets, to the extent that there are no major shocks. But Asia asset managers are largely confident of outperformance for the region compared with other world markets.