By John Crawford, fund manager at Henderson Global Investors Global equity markets have rallied...
By John Crawford, fund manager at Henderson Global Investors
Global equity markets have rallied strongly since early October on the back of better-than-expected corporate earnings, reduced fears of a military attack on Iraq, and improving economic data in the US.
The Asia-Pacific region has been no exception, buoyed by investors' improved tolerance for higher-risk assets and attractively valued shares. Highly cyclical markets have performed especially well, with both Korea and Taiwan up by 14% and 16%, respectively.
However, this has been partly offset by lacklustre gains in Australia, which is a large component of regional indices, but whose relatively defensive low volatility and high yields make it a traditionally defensive option.
We believe Asia-Pacific continues to offer an attractive investment opportunity for investors with medium- to long term horizons. The region's economies are fundamentally more sound today than at any time since the Asian crisis of 1997.
Most countries are enjoying current account surpluses, higher foreign reserves and low interest rates, and their demographics are favourable: financial systems are gradually being overhauled, and companies are undergoing structural changes that are reflected in higher equity returns and better than expected earnings. Furthermore, equity valuations remain extremely attractive.
In the short term however, local stock markets remain vulnerable to external risks. One is the collapse of the fragile Japanese financial system, which would be extremely negative for the entire region. Another is a war between the US and Iraq, which would have immediate repercussions on oil prices. Should a conflict be averted, our view is that the US economy will avoid reversing into recession, and that a soggy global recovery will emerge. In this case, Asia-Pacific equity markets should outperform, with upward revisions to corporate earnings sustaining the market's momentum over the medium term.
With global economic growth expected to be sluggish at best, we have shifted our focus away from the more export-oriented economies towards those where domestic demand is improving. Consequently, we are overweight in Korea, Thailand and Malaysia, as well as in China, which continues to benefit from production outsourcing.
We are heavily underweight in Hong Kong, where deflation is entrenched and the government is unlikely to take the difficult decisions to effectively tackle the situation, and in Taiwan, where the domestic economic environment is deteriorating.
Our sector allocation complements these views. We are overweight in consumer-oriented stocks and the telecoms sector (where we are focusing on fixed-line operators with utility-like, stable revenue and cashflow streams, and high dividend yields), and underweight sectors geared to a pick up in global industrial production.
Stock selection remains critical, as companies failing to meet investors' earnings expectations are being punished harshly by the market. We prefer companies with reasonable earnings visibility, healthy cashflows, and with strong capital management skills.
Asian economies are fundamentally sound.
Companies undergoing structural changes.
Equity valuations remain attractive.
Region vulnerable to external risks.
Weak global recovery dampens exports.
Deflation hitting growth in HK and Taiwan.
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