By Richard Cardiff, Asia and Japan regional specialist at JP Morgan Fleming Asset Management The...
By Richard Cardiff, Asia and Japan regional specialist at JP Morgan Fleming Asset Management
The emerging market asset class is often seen by investors as a leveraged play on the global economy.
The strong weighting of cyclical companies within emerging stock markets, whether manufacturing or raw materials, makes the asset class sensitive to changes in global demand.
With many analysts now predicting an upturn in US and global growth from mid-2002, is now the time to be looking for an increased exposure in emerging markets?
In the first place, emerging markets tend to outperform as developed economies move out of recession.
Asia is also now at the heart of global manufacturing, making its stock markets particularly sensitive to any upturn in demand from the developed world.
China and Taiwan both joined the World Trade Organisation in November and their share of global trade is likely to continue to rise steadily as outsourcing from the developed world continues.
The strong rally in Asian stock markets during the fourth quarter of 2001 was in anticipation of a recovery in global demand for manufactured goods, particularly information technology products.
It was fuelled by liquidity, as central banks around the world reduced interest rates. Now some analysts suspect that the region's stock markets may have moved too far too fast. Particularly as a sharp US economic recovery is by no means certain.
After all, the MSCI Pacific ex-Japan region rose 21% in sterling terms in the final quarter of 2001. This, compared to a 10% rise in the MSCI World index and a 7% gain for the UK's FTSE index, both in sterling terms.
There continues to be the risk of a prolonged U-shaped downturn in America, as the high level of corporate and household debt leaves little room for further borrowing to pay for increased consumption and investment.
There is also the risk of a 'double dip' in which an upturn in investment spending in the US, which is positive for Asia, coincides with a downturn in consumer demand, and fears of unemployment lead to a rebuilding of domestic savings, abruptly halting US investment spending.
But valuations are attractive in Asia, even after the recent rally. Hong Kong is on a trailing P/E of 15 times earnings, South Korea is on 13 times, and Singapore is on 16 times (all local market indicies).
These compare with 32 for the S&P 500 index in the US, and 20 for our own FTSE.
Our view is that the economic cycle in the US is bottoming out and that a shallow recovery will follow.
Investors should be starting to look at the Asia region and other emerging stock market regions, where valuations remain attractive despite the strong fourth-quarter 2001 rally.
But beware of the possible risks of the US recovery being de-railed and the negative impact that that would have on the growth sensitive Asian markets.
Emerging markets outperform.
US economy looks to be bottoming out.
Asia now at heart of global manufacturing.
Risk of double dip in the US.
Negative impact of potential US downtirn.
Market has already rallied strongly.
£300bn of liabilities
View from the front row
Transfer from occupational scheme
Appointed by FCA and PSR boards