By Kathryn Langridge, manager of the Invesco Perpetual Asian Fund Widespread recession and the e...
By Kathryn Langridge, manager of the Invesco Perpetual Asian Fund
Widespread recession and the events of 11 September combined to bring global stock markets down by an average of 17% over 2001. But although Asia had a difficult time during that period, Asian markets ended the year only down 5%, and of the six top-performing countries worldwide last year, four were Asian. A remarkable recovery since the end of the third quarter suggests that prospects for the region, while still uncertain, are more positive than they have been for some time.
With 25% of Asian GDP directly related to exports, the region is highly sensitive to the fortunes of the global economy and particularly to those of the US, so the regional markets were already performing badly prior to 11 September, hitting a low point at the end of September.
But the global trade cycle appears now to have turned the corner, with several favourable implications for Asia's position.
Forty per cent of Asia's exports are electronics-related so the pick-up in the technology cycle is particularly important. DRAM prices have almost tripled since the middle of September 2001. At the same time, however, oil prices have fallen, amounting to a positive shift in the balance of trade for Asia.
But we have also seen significant improvements in the region- al domestic backdrop. After a long period of austerity, consumer confidence has been building up in a number of Asian economies, helped by low inflation and interest rates, and further bolstered in some countries by counter-cyclical fiscal policies.
The Korean, Chinese and Singaporean economies are in a strong position to capitalise on any growth in global trade during the course of this year, although we also anticipate powerful responses to a trade pick-up in the smaller Asian economies such as Thailand and even Indonesia.
Overall, we now see this as a good time for opportunistic investors to consider a limited increase in exposure to the region. There are clearly uncertainties still ahead on the road to global recovery, and shrewd stock picking by fund managers is essential; but the fact remains that Asian market valuations are low, especially in comparison with those in the US, which arguably are still stretched.
Asian companies are much leaner and fitter now than for many years: we anticipate earnings recovery of around 16% this year, and return on equity rising to around 10%-12%.
We see several sectors as worth close examination. The most central for the coming year is domestic consumer demand, which is certainly bolstering several economies including those of Korea and Taiwan. Technology may seem another obvious choice at first sight ' but we believe that in the wake of the supercharged technology rally after 11 September, valuations are now stretched.
We therefore prefer to adopt a cautious, stock-by-stock approach to the technology sector, taking a relatively defensive line. We look for strong firms with stable cash flows, low debt, low price/earnings ratios and good quality management, capable of delivering positive earnings surprises, and in many cases passed over by the market ' in a nutshell, growth at a reasonable price.
Exports fuelled by signs of global cycle upturn.
Strong domestic consumer demand.
Cheap valuations for world-class companies.
Uncertainty of global economic climate.
Problems in Japan and a week yen.
Technology rally could be another bubble.
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