A strong investment case has been building in Asia since 2000, when the region began to recover from...
A strong investment case has been building in Asia since 2000, when the region began to recover from its pre-crisis excesses. Due to its open economies, exports suffered as the fallout from the technology boom hit demand for electros. This in turn dented inventories and the region's nascent recovery from crisis was dragged off course.
But thanks predominantly to a stimulative environment, global growth is firmly on the recovery path. Asia is well placed to benefit and this is already being seen in the economic numbers.
The next main driver for the market will come from corporate earnings growth and we are starting to see upgrades coming through. Korea has led the way, with the economy benefiting from an export recovery and strong domestic demand. In September, analysts were expecting Korean earnings growth of about 20% in 2002 and now some are expecting 60% or more.
Encouragingly, earnings are also improving in other countries and broadening out to domestically-oriented sectors. This is most apparent in Malaysia, where we have seen earnings growth upgraded from 10% to 19%, an almost doubling of growth expectations.
In Singapore, the government is expected to boost consumer demand through tax cuts and announce new initiatives in housing policy and pension reform in the upcoming budget. There have been tentative signs of credit growth in Taiwan too, although the earnings growth focus is still primarily technology dependent.
In Hong Kong, the picture is more problematic. Although it will benefit from cyclical recovery, policy response is more constrained. Both interest and exchange rates are locked in by the peg and the region is fiscally constrained due to the reliance of property-based revenue which suffers under deflation. Fortunately, there are stocks that benefit from having China as a cheap manufacturing base on the doorstep. Many opportunities will be provided by these stockpicking ideas in Hong Kong.
But, as ever, there are risks to the region. Rises in US interest rates could cause a halt to market progress. Hong Kong would have to follow and perhaps Korea, where there are some signs of localised overheating.
However, given the over-capacity and lack of inflationary pressures in the region, interest rates elsewhere should remain low. Ultimately, higher US interest rates should be taken positively as a sign that the Fed is confident of a US recovery, the most important driver in the region.
Japan and yen weakness is an ever-present threat and may raise its head again soon now the fiscal year end has passed and the Bank of Japan continues to pursue a loose monetary policy. However, Japan's influence on the region has declined significantly. The impact should be far more muted than was historically the case, with any impact felt through weaker currencies.
While acknowledging the region outperformed post September, we believe the investment case for the region remains strong and valuation is still very supportive, although not as outstandingly cheap as it was in October.
Asia is a prime beneficiary of recovery.
Earnings upgrades coming through.
Earnings are widening out in to domestics.
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