aberdeen's devan kaloo says the region's return on capital employed is better than in the US
The Far East is set for a period of sustainable positive returns on the back of restructuring in the late 1990s.
That is the view of Devan Kaloo, fund manager with Aberdeen Asset Management Asia, who believes that the economic growth the region has displayed in the past will be fed through to equity market returns.
Kaloo believes his most powerful argument for why Asian markets deserve a re-rating is the fact the region's return on capital employed is now better than that of the US. It stands at almost 20% compared with just above 8% for the United States in 2002.
At the same time, he believes the markets offer value with the MSCI Asia ex-Japan index now standing on a P/E of 11.4 times.
Between 1986 and 2001, the region produced higher economic growth than the US every year except for 1998, according to Aberdeen, while its markets have lagged well behind those of North America.
Kaloo cited numerous reasons why economic growth had not led to profits growth for companies in the past.
He said: 'An economic reason is that companies did well but did not then move up the value chain. There was an issue of management with family owned firms seeing a listing as a way to get cash. Many companies had problems with their finances, for instance borrowing in dollars but having revenues in local currencies.
'Finally there was a misunderstanding of shareholder value and corporate governance. These are relatively new developments but they are coming in.'
As a group, Aberdeen is not expecting the US to stage a rapid recovery, something traditionally seen as a positive for Asia.
However, it sees few upward pressures on interest rates in the region as economic growth is modest and it predicts the domestic sector, not the exporters, will lead the recovery.
'The fundamentals in Asia are improving and reforms mean better market returns,' said Kaloo. Among the catalysts for change identified by Kaloo are a new generation of politicians from the likes of Taiwan, Korea and Philippines, who have come to power following the Asia crisis of the late 1990s and understand the need for reform.
He said: 'Markets are opening up to competition so consumers are beginning to spend money because they have choice in what they buy. Banks traditionally lent to corporates but now they lend to consumers, which is leading to a boom.
'Governments are forcing companies to improve disclosure and many corporates realise they have to do this themselves. Competition means people consolidate businesses and become more competitive.'
Within its portfolios, Aberdeen is underweight Australia, which it sees having good but expensive companies, and Taiwan, which has close links to the US. In addition, Kaloo said the company structures are opaque, which is negative for investors. This is because Taiwanese companies are not allowed to invest in China but are moving production to the mainland via offshore companies. Aberdeen's biggest overweights are in Singapore, at 14.5% against 7.3% for the MSCI Asia ex Japan benchmark, and South Asia in general. The biggest threat to this scenario is if the re-rating of the markets takes the pressure off Asia to continue with reform, according to Kaloo.
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Reporting to Steve Hill
Appointed on 19 September