Asian markets are once again facing extreme stock market weakness, with many of the region's indices...
Asian markets are once again facing extreme stock market weakness, with many of the region's indices at 12 month lows, or worse. However, unlike the Asian crisis of 1997, the current sell-off has occurred against a backdrop of strong earnings growth and progress on structural reform.
The degree to which global growth slows will be a crucial factor in the near-term direction of Asian markets. Leading economic indicators certainly point to a decline from the high growth rates we saw in 1999, with third quarter industrial activity in the OECD having decelerated to around 5% year on year.
Nevertheless, in this environment, Asian exporters are still capable of generating 20% earnings growth for 2000.
The direction of oil prices is also important. Asia is a net oil importer and the higher price will affect current accounts. It also presents a challenge at the corporate level, as the region's manufacturers may be unable to pass on increased production costs to the consumer.
Reform is a recurrent theme in Asia. The lack of progress at the political and corporate levels in the South East Asian countries (Singapore excluded) has left their markets increasingly marginalised. Continuing cronyism and political uncertainty suggests other markets will offer better investment opportunities in the coming months.
In contrast, the north-eastern countries such as Korea and Taiwan are much stronger.
Moreover, the drivers for company restructuring remain. There has been little credit extension from banks and companies are raising funds through capital markets, bringing the concept of shareholder value firmly into the boardroom.
The outlook for these markets depends to a significant extent on global demand for semiconductors and D-RAM. Intel's announcement of softer third quarter earnings figures has dampened exporters' prospects while D-RAM spot prices have fallen over 15% from their July peaks. Mobile phone handset demand expectations are also strong, particularly in China.
The previous D-RAM expansion cycle lasted four years; the current expansion is only 18 months old. We believe D-RAM companies are oversold and represent an excellent buying opportunity. China's cyclical recovery is boosting sentiment in the region. Improvement at the macro level is now being reflected in higher corporate earnings. GDP growth is above 8%, providing support for the reform of loss-making state-owned enterprises.
A healthy stock market will further support the privatisation process. The impending initial public offering of Sinopec, the state-owned oil producer, is a prime example. China's market should perform strongly in this environment. The principle beneficiary of China's recovery is Hong Kong, whose outlook for the next six months is boosted by the consensus view that US interest rates have peaked.
Billy Chan is director of investments at Invesco Asia
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