Asia performs well when liquidity moves into the region, according to Inv Perp's Stewart Parks
An improving trend in liquidity should enable Asian stock markets to continue their relatively strong performance, delegates at the Investment Week Far East markets forum were told.
Speaking at the event held in London on 16 October, Stewart Parks, co-head of Asian Equity at Invesco Perpetual, said: 'If you look at trends, Asia performs well when liquidity moves into the region and badly when it moves out.'
Parks defines liquidity as current account surpluses, foreign direct investment, bank and portfolio investment.
'During the Asian crisis in 1997, all these moved out at the same time,' he said. 'What we are now seeing is a gradual improvement in the liquidity situation. Markets have started to perform well relatively, if not absolutely, over the past year.'
Parks sees the stalling of Asian performance in the past few months as a direct result of overseas portfolio investors aggressively selling shares.
'Foreigners have sold Korea for six months,' he said. 'In Taiwan, foreigners sold £2.5bn worth of stock in September alone. That really is the problem. It is very difficult for markets to perform against such concerted short-term selling.'
Over the longer term, Parks believes the liquidity trends are still favourable. Asia is no longer dependent on world economic growth and uses the capital at its disposal better, he said.
'Korea, for example, used to be a capital expenditure junkie, but annual growth in capital expenditure has slowed from 40% to 8%,' he said.
'In most countries across the region, there are current account surpluses instead of deficits. Surpluses lead to lower interest rates and governments can now spend as debt is low as a percentage of GDP.'
Looking at liquidity helps Parks position his portfolio within the markets. If liquidity is rising, he looks for high beta stocks to take advantage.
He also seeks companies for which markets are wrong about growth rates over the long term.
'It is extremely difficult to work out what earnings growth will be in future, so I look at relative rates and for anomalies in what companies are pricing,' Parks said.
Market-implied growth rates are not infallible but are a great reality check to see if the market is wrong, he added.
Parks believes domestic consumption will be a growing influence on Asian markets in coming years.
'Asian consumers used to get a raw deal as government priorities aimed at making sure exports grew,' he said.
Now, he added, there is much greater emphasis on banks lending to their population to help them buy things, although, compared with the US, savings rates are high.
In addition, corporate debt gearing is down from 60% to less than 30% in five years.
'Combine this improving liquidity with returns on equity that are attractive on a global context and, on 1.25 times book value, Asia is extraordinarily cheap,' he added.
The AA-rated Invesco Perpetual fund has fallen 20.5% over the three months to 7 October, on a bid-to-bid basis. This compares to the Far East ex-Japan sector average return of -20% over the same time period.
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