By Ezra Sun, a fund manager at Newton Two years ago, few investors would have perceived Asia to ...
By Ezra Sun, a fund manager at Newton
Two years ago, few investors would have perceived Asia to be a safe haven. Those investors are probably still correct in thinking so. Indeed, in today's markets, there seems no place to hide.
However, when faced with an almost 24% drop in the MSCI AC World index, a 26% drop in the S&P 500 and an equal drop in the FTSE, a mere 6.9% slide in the MSCI AC Asia Pacific ex-Japan index makes Asia look decidedly safe.
The reasons behind Asia's outperformance are manifold. One explanation lies in its attractive valuation levels, trading at a P/E of 11.5 times 2002 and 9.7 times 2003. Undemanding valuations in Asia, together with good earnings growth and leaner balance sheets, have supported the region's markets over this difficult period.
Furthermore, the fundamentals have improved significantly, both at a macro and company level. The low interest rate environment has had the effect of fuelling private consumption in the region. Consumers have been flooded with liquidity and have been able to finance the purchases of luxury items.
Growth was driven by cheap financing through lower interest rates helping to revive the property sector and boosting car sales.
Korea has also been a beneficiary of rate cuts, which can be seen in the steadily increasing consumer credit growth ' nearly 15% year-on-year. This, in turn, was one of the factors behind the favourable retail sales growth figure of 6.2% in July.
Unemployment is also low, government finances are stable and overall momentum looks healthy. One should not forget exports either, which, despite the uncertainty, have been equally strong in Korea, growing at almost 20% in July and August.
Korea is one of the few countries whose economy is supported by two engines of growth: both domestic and external demand. These promising indicators were perhaps why the IMF was prompted to review its forecast for Korean GDP growth to 6.25% this year.
Financials are looking much healthier, having gone through a vigorous process of deleveraging and reparations of balance sheets since the Asian financial crisis. Many Asian companies, now cash rich, have been able to increase dividends because of steady earnings and cashflow growth.
There has been a change in the mindset of Asian management, which is increasingly aware of creating value by returning cash to shareholders. A significant amount of Korean companies do this either through share buybacks or increasing dividends. Particularly in volatile markets such as these, dividend yields are merited for acting as share price floors. They also send a strong signal to the market that a company is truly generating cash returns.
The fortune of the Asian markets will continue to be dictated by the US. However, we expect Asia to continue to outperform its Western counterparts in the same consistent manner as it has in the past year, supported by valuations, strong macroeconomic fundamentals and drivers of growth. If, however, a recovery in the US and global economy does emerge, Asia, as the most highly leveraged play, stands to be the biggest beneficiary.
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