By Hugh Young, managing director of Aberdeen Asia The global economy is in need of a makeover as...
By Hugh Young, managing director of Aberdeen Asia
The global economy is in need of a makeover as it suffers from a crisis of confidence in the US, a depressed Japan and shaky Latin America. If 2001 is best remembered for the unprecedented terrorist attacks in the US, then 2002 has already shaped up to be a year in which financial markets have parted company with recovering economic data.
In the US, corporate accounting malfeasance, coupled with earnings shocks, has undermined Wall Street, with the Nasdaq and S&P 500 diving to five-year lows. Declining jobs growth and falling industrial output, meanwhile, has raised the spectre of a double-dip recession and consensus now favours the Fed to lower interest rates by the fourth quarter.
Although emerging markets have succumbed in tandem, the magnitude of the decline, particularly in Asia, has been less severe, reflecting the resilience of the region.
Abundant liquidity and cheap valuations continue to be the pillars of Asia's outperformance, with flexible exchange rates, current account surpluses, strong foreign exchange reserves and improving corporate governance standards its main comparative advantages. In addition, an emphasis on boosting domestic demand has bought a new balance to growth, although exports remain vital.
North Asian stock markets staged a better performance than Southeast Asia in the final quarter of 2001, but only South Korea has sustained its promise, thanks to strong credit growth, a healthy domestic demand story and buoyant stock market. Company earnings have also shown improvement, supported by robust economic data.
Taiwan has underperformed, however, due to its bias toward tech stocks. Although valuations have corrected over the past year, technology as an asset class still seems relatively expensive.
China has kept growth on track, with GDP growing by 7.3% for 2001 and 7.8% in the first half of this year, on an annualised basis. Strong, state-directed, fixed-asset investments, retail sales and robust export growth are the main drivers behind its success.
While we like the macro economic story, there continues to be a dearth of quality at the company level. Consequently, we still prefer to unlock its potential via companies listed on the Hong Kong stock exchange.
After underperforming the North in 2001, Southeast Asian markets have staged a strong rebound this year. Here, Indonesia's Jakarta Composite Index and the Stock Exchange of Thailand Index have led the way, with gains of 29% and 28% respectively in the first six months to the end of June.
Indonesia's return to favour is due to president Megawati's success in restoring political stability, with recovering economic data allowing the central bank to lower interest rates. Also supporting the stock market is the rupiah's strong advance against the dollar.
On balance, we expect the pattern of the past few months to continue, with equity markets likely to remain volatile. The major external risks include declining US consumer confidence, the ongoing tensions in the Middle East and the India-Pakistan conflict.
Stock at cheapest level for a decade.
Opportunities at stock level.
Abundant liquidity in the market.
|Declining consumer confidence in US.
Conflict between India and Pakistan.
Tensions growing in Middle East.
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