Fidelity South East Asia manager KC lee is continuing his long-term stance of favouring Kong Kong ov...
Fidelity South East Asia manager KC lee is continuing his long-term stance of favouring Kong Kong over China.
Lee remains underweight in Korea as a result of the rapid rise in household credit which has almost doubled in three years. This has resulted in strong growth in the economy, Lee believes, but represents borrowed prosperity.
John Ross, senior global strategist at Fidelity, said: 'He does not rule out structural changes in the spending behaviour of Koreans, who in the past have saved a large part of their incomes, but he believes the economy will inevitably slow down because this growth is not sustainable.'
The Asian region offers some of the best global opportunities, Ross said. 'One of the significant developments in the region has been the emergence of China as the powerhouse of manufacturing for the region. China has now overtaken the Asian countries as the prime destination for foreign direct investment. China offers a cheap and efficient labour force.'
'As a result, the centre of economic growth has moved from the Asian region to China. China has been able to grow at a much faster pace than the rest of the region,' Ross said.
He added: 'We think Hong Kong is one of the best ways to benefit from China's rapid economic growth.
'Firstly, Hong Kong will continue to be the service centre for the big and still expanding manufacturing base in the Pearl River Delta area.
'Secondly, Hong Kong will remain the financial centre in Asia with an increasing role of providing financial services to China. This will be the case as long as China maintains exchange controls.'
The group believes Hong Kong will be the means by which Chinese companies enter the international market. The free movement of capital and access to the international market give Hong Kong the advantage over Shanghai, Ross said.
Japan has a more gloomy future as the economy has suffered from a weak banking sector. Banks have been lending less and less each year and have been writing off bad loans for much of the 1990s. However, they have only scratched the surface,' he added.
Government action on the banks, including a two-year programme to buy banking shares, is part of planned anti-deflation measures and is welcome, Ross said, but in order to avoid an economic crisis, the government must announce a supplementary budget and safety-net policies, something Fidelity believes it is likely to do.
Ross said: 'The positives are that the authorities finally realise they need to act. The share purchases will add liquidity to the market insofar as it means those shares will not come onto the market. It helps to reduce cross shareholdings, though only marginally.'
That means, he said: 'The banking system will eventually be stronger. Longer term, a lot of excess capacity will be eliminated and the surviving firms will be much stronger than now. Finally, it paves the way for a new bull market ' though the timing of this is uncertain.'
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