During the third quarter of 2000, the FTSE Pacific (ex. Japan) Index declined 7.0%. Although Asian G...
During the third quarter of 2000, the FTSE Pacific (ex. Japan) Index declined 7.0%. Although Asian GDP growth is strong and analysts are forecasting 20-25% growth in Asian company profits in 2000, there has been a lack of liquidity to drive stock markets higher.
Broad money supply has decelerated, not only in the US but also in Asia. In Asia, credit expansion is no longer in excess of nominal GDP growth, as debt levels are still high and there is de-leveraging.
In South East Asia, bank systems weakened by the crisis of 1997-78, are taking time to recapitalise and finance credit expansion. In Thailand, for example, bad loans in the banking sector have fallen, but only to 31% of total loans.
On valuations, Asia is at a large discount compared with other regions. Its P/E ratio is 16 for 2000, and is expected to fall to 13 for 2001, compared to 25 in the US and over 20 in Europe. Asia's P/B value is 2.2, compared with over five in the US and four in Europe.
Asia offers a spectrum of risks and opportunities. The main risk factor is that higher US interest rates lead to a slowdown in Asian exports to the US, the world's biggest economy. Indeed, recent warnings by US bellwether companies, such as Lexmark, Apple, Intel, Dell, Xerox, Lucent and Motorola, that sales and profits may fall short of expectations, may signal slowing demand for Asian electronics out-sourcers and parts suppliers.
Another risk is the pulse of inflation pressure from higher oil prices, which may delay the time when central banks' monetary policies turn easier, and dampen economic and profits growth.
China's entry to the World Trade Organisation is a positive factor. It should bring considerable growth in trade and economic benefits. Measures of economic development, such as GDP per capita, show scope for catch-up growth.
On sector strategy, Swiss Life has been tactically switching away from technology stocks to companies with safer, more stable earnings, such as Hong Kong and Singapore Banks and Real Estate. A feature of the country weights of the Pacific portions of our Far East portfolios, benefiting relative performance this year, is an above average weight (compared to other like-funds) in Australia.
Also, we are generally in-line or overweight in Australia compared to benchmark indices. This country merits a gold medal for 13 consecutive quarters of above 4% year-on-year GDP growth. In the Hong Kong portions, we are well represented in H shares.
H shares currently stand on a large valuation discount to A shares. As China deregulates, opening up A shares to foreigners and allowing Chinese investors to buy H shares, the valuation gap should narrow.
David Hodgson is a senior fund manager responsible for Japan and Pacific Markets at Swiss Life Investment Services
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