The Sars outbreak has severely impacted sentiment in Asia this year although recent news is encourag...
The Sars outbreak has severely impacted sentiment in Asia this year although recent news is encouraging. Both China and Hong Kong were on course to achieve strong and sustainable performance.
Last year, China's exports grew 22% which greatly contributed to GDP growth of 8%. The country's appetite for imported commodities such as steel, iron ore and oil is growing. This is benefiting other Asian producers and inter-regional trade is 40% of the region's total trade. In the first quarter of 2003, China's GDP grew by 9.5% and exports are still extremely strong. Therefore, while the long-term impact of Sars depends on its duration, we believe that real GDP is only likely to decline by 0.5%-1.0% this year if the virus is contained.
Our China exposure is focused on the China National Offshore Oil Corporation and PetroChina. These holdings are a play on China's dependency on imported oil. Both companies are cheaply priced with good prospects and have sensible managements.
We are overweight the Hong Kong and Singapore markets. Both provide an average yield of about 4.5%. In Singapore, we hold stocks such as Keppel, Fraser and Neave, SembCorp Marine and Singapore Press Holdings as well as the two largest domestic banks. These businesses possess monopoly characteristics, excellent track records and net cash positions on their balance sheets. They also provide the comfort of secure dividends. The banks are well-capitalised and have sound franchises.
The South Korean market is very cheap, despite possessing well-managed, global businesses such as Samsung Electronics and Hyundai Motors which trade at significant discounts to similar businesses in other markets.
One reason for this is the abuses of corporate governance by which the equity market is plagued. A recent example is the $4bn scandal at the SK Group. Foreign investors own 35% of the Korean market but we sense that they are starting to sell on the back of increasing financial and political concerns, which provides opportunities for us to buy businesses at even cheaper prices.
The Taiwan market is dominated by technology companies, whose share prices are heavily influenced by the Nasdaq. This year, the Taiwan large-cap index has significantly underperformed the Nasdaq and tech bulls are suggesting that the market is therefore cheap.
We suspect earning forecasts for large market constituents such as the chip foundries, TSMC and UMC, are too optimistic. There has not been a sufficient reduction in capacity in the technology sector, or a pick-up in end user demand, to make these stocks attractive.
In Japan, there are many world class companies but their share prices have been undermined by pension fund redemptions and the unwinding of cross shareholdings. The consequence of this structural selling is that the best companies in Japan have underperformed significantly this year and their share prices are now exceedingly cheap. While we remain underweight Japan, our strategy is to look beyond the economic data and to concentrate on selecting the best businesses in Japan.
Earnings are likely to surprise.
Valuations are attractive.
Bank deposits could support a market rally.
Subject to unitholder approval
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