Most Far East ex-Japan stock markets have, of late, fallen less than those of developed countries, p...
Most Far East ex-Japan stock markets have, of late, fallen less than those of developed countries, primarily due to their stronger economic performance.
According to estimates from Dresdner Kleinwort Wasserstein (DKW), the Far East ex-Japan region's economy grew by 6.1% in 2002, compared with a rate of 1.2% for the G7 counties, the world's largest industrialised nations. In 2003, DKW expects the Far East ex-Japan economy to grow by 5.5%, a rate still far in excess of its forecast of 1.2% for growth in the G7 economies.
Growth, however, is not homogeneous across the region. Hong Kong remains relatively weak, despite its proximity to the vibrant Chinese economy, due to the continuing effects of weak property prices. The Singaporean and Taiwanese economies are lacklustre, while China, India and South Korea have seen relatively robust economic performance.
The main reasons for the strength of these Asian economies are the buoyancy of domestic demand and the high level of inward investment from companies located in developed economies looking to lower their costs by outsourcing manufacturing.
China has been a notable beneficiary of these trends and, in some cases, the competitive position of Chinese companies has started to undermine the profitability of companies located elsewhere in the Far East ex Japan region where labour costs are higher.
Standards of corporate governance have been rising, the level of foreign exchange reserves are increasing, and the strength of the banking systems continues to recover from the problems created by the 1997/98 Asian crisis.
Thailand has been a good example of these trends, a fact that explains the relatively resilient performance of the country's stock market over the past year. Furthermore, the current valuation of the region's stock markets is unjustified compared to that of developed markets.
For funds to outperform the sector, the key driver remains their relative geographical exposure. For example, having less exposure to Hong Kong, a greater emphasis on investments in China and being overweight in Thailand have been positive benefits.
Furthermore, stock markets in Thailand, New Zealand and India are frequently neglected in favour of larger more liquid markets but the combination of attractive valuations and promising economic and corporate fundamentals continues to make these good places to invest.
Another way of adding value is to take advantage of opportunities created by volatility in the level of discounts on investment trusts and New York-listed funds investing in the region; quite simply through buying shares in trusts at large discounts and selling them once their discounts have narrowed.
A number of well managed regional generalist investment trusts, such as Schroder Asia Pacific, Fidelity Asian Values, Pacific Horizon and Henderson TR Pacific have offered such opportunities.
China, India and South Korea are robust.
Buy at a discount via closed end funds.
Standards of corporate governance rising.
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