Over the past two months, Far Eastern stock markets have given back some of the year-to-date gains i...
Over the past two months, Far Eastern stock markets have given back some of the year-to-date gains in sympathy with a weak Wall Street.
While US-centric issues of corporate profitability, volatile retail sales, the integrity of reported earnings and generally positive economic releases were overwhelmed by negative investor sentiment in US markets, Asian economies continue to signal that an economic recovery is well and truly under way.
GDP in Asia (ex-Japan) is likely to expand in excess of 3.5% this year followed by equally robust growth next year. New World Trade Organisation member China leads the region with a forecast growth of around 7%, while Indonesia is at the other end with a forecast of 3% growth for 2002.
Although Asia is traditionally reliant on exports to fuel its growth, there is widespread agreement that it must advance beyond export-led growth by cultivating domestic demand. Signs of a nascent domestically driven economy are increasingly apparent as consumer loans and credit card ownership rises and vehicle numbers increase across the region.
In addition, the long-term investment case for Asia is primarily anchored by structural changes occurring at the macroeconomic level, heightened corporate governance and a more professionally managed and commercially driven corporate sector.
Paradoxically, the Asian financial crisis has laid the foundations for better equity markets. There is now better regulatory oversight, increased awareness of minority shareholders and greater transparency. Equally important, allocation of financial resources at the government and private sector levels are driven more by policies and commercial returns rather than by political patronage, owner shareholders and lobby groups.
Asian banks have generally been restructured and recapitalised to facilitate growth. Government-backed agencies such as Korea Asset Management, Danaharta in Malaysia and IBRA in Indonesia have bought bad loans, repacked and sold them, leaving once crippled banks with a clean slate. Interest rates for mortgages and hire purchase are the lowest for many years.
Similarly, deposit rates are low. Coupled with one of the highest savings rates in the world, it is not surprising that demand for consumer discretionary items, from electronic goods to big-ticket items like properties, cars and motorcycles, are still rising strongly. Property prices and vehicle sales numbers have in instances surpassed pre-crisis levels in countries like China, Indonesia, Malaysia, India and Thailand.
On valuations, the MSCI Far East (ex-Japan) is at 15 times the 2002 earnings estimate with about a 30% cumulative average growth rate over this year and the next. Asia is at the lowest end of its price earnings ratio range since the early 1990s.
Our position is currently inclined towards the consumer and, in particular, the larger banks across the region. We believe that interest rates are structurally lower and together with consumers' greater accessibility to bank loans, are the themes that will be dominant in the future.
Structural changes at macroeconomic level.
Heightened corporate governance.
Professionally managed corporate sector.
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