One national paper over the Easter weekend suggested that emerging Far Eastern markets were a danger...
One national paper over the Easter weekend suggested that emerging Far Eastern markets were a dangerous place to commit money to and that great care is necessary when doing so.
Only time will tell whether this concern is justified but I believe the newspaper may be missing an opportunity to make better returns than those likely to be achieved in the more developed markets.
The first three months of 2002 have seen good performances from Asian markets and even Japan has produced a better return in local terms than either the US or the UK markets.
However, while Japan's Nikkei has risen 4.6% against the US Dow's 3.8% and the FTSE All- Share's 1.3%, South Korea has produced 29.1%, Thailand 23.1%, Indonesia 22.9% and Philippines 20.2%. One can immediately see why there may be concerns, especially when the two other key markets in the region, Hong Kong and Australia, have returned -3.5% and 0.1%, respectively.
For a US investor, the poor showing of Australia in local terms has been improved by some currency strength from the Australian dollar, which has strengthened by more than 4% in three months to give a better overall return than the US market, according to Bloomberg.
The easy money has therefore likely been made in Asia post the events of 11 September but perhaps not. Before the terrorist attacks on the US, the worry of the US slowing down and falling into recession was taking a severe toll on Asian economies and markets.
Overcapacity was rife and, as demand fell, profitability went with it. In electronics, in particular, prices of components fell to below manufacturing cost and even the leading players suffered heavy losses. Even in the first quarter of 2002 losses are still being made, but the trend is upwards, and by the second quarter profitability should be restored to many.
These stocks must now be looked at in the same way as one would a cyclical stock such as steel or chemicals. That means they need to be bought when P/Es or equivalent measures are high and sold when they reach low multiples. The key is to read the cycle correctly and sell before the next downturn, often at the time when optimism for yet another good quarter or two is at its peak. We are past the optimum time to buy.
That occurred in late September and early October, but the trend is continuing to improve and so the rise can go on. Valuation levels on a prospective basis continue to fall, giving the prospect of share prices rising in line with earnings forecast rises.
On top of the electronics recovery, domestic sentiment has also improved, especially in Korea and Singapore. A plentiful supply of liquidity is helping both markets and the former is buoyed by the prospect of hosting the World Cup in June.
The latter is showing recovery from recession and, with the Monetary Authority of Singapore relaxed about recent currency weakness, we can see better economic growth translated into better market returns.
Overall, therefore, while there has been a strong recovery, it has been off a low base.
Strong performance from Asian markets.
Current electronics recovery.
Domestic sentiment has improved.
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20 years experience in multi-asset