It is three years since the collapse of the Thai baht ushered in Asia's economic and financial crisi...
It is three years since the collapse of the Thai baht ushered in Asia's economic and financial crisis. Since then, Asia's outlook has improved dramatically.
Despite this, several key issues still pose a threat to the continued recovery of the region. Foremost is the state of the real US economy, secondly, the interest rate cycle in the US is a key concern. Finally, the ongoing pace of reform is crucial. This must be maintained if any recovery is to be sustained. Within Asia, our views on the outlook for the region's key markets has diverged significantly.
The outlook for the Far East's smaller markets still remains unclear and as a result, returns over the next six to 12 months are likely to be subdued. This has led us to take an underweight stance. In Indonesia, the political situation still dominates and in-fighting within the current administration is rife, delaying much needed reform.
Meanwhile, in the Philippines, investors have also been repeatedly disappointed by the lack of progress made by President Estrada's administration. This, coupled with anaemic economic growth, is likely to keep investors away for the foreseeable future.
In Thailand, politics plays second fiddle to the under-capitalised banking system. Many of the country's banks still remain weak and further reform is desperately needed. Malaysia, meanwhile, has escaped some of the ravages of its neighbours through the use of capital controls.
However, despite the country's impressive headline growth rates, we remain underweight. As a result, the country has simply put off problems, rather than solved them.
Elsewhere, the outlook is more positive and there is substantial potential for significant gains over the next 12 months. We are generally overweight in these markets, which are characterised by strong economies and structural reform.
The story is perhaps strongest in China, where the economy appears to be undergoing a strong cyclical rebound, thanks in part to the government's efforts to reflate the economy. We also remain positive on South Korea. Again, the corporate sector appears to be undertaking continued reform. Divestment of non-core businesses and the reduction of gearing should help to push profitability to new highs.
Taiwan is gaining additional strength from the fact that it is becoming a significant beneficiary for the outsourcing of Japanese production. Singapore has also undertaken significant reforms, including the relaxation of controls on the financial sector and the liberalisation of the telecommunications sector. This has fed through to the corporate sector which is seeking to employ capital more efficiently.
Finally, despite our positive stance on China, we remain more guarded on Hong Kong.
Tim Dickson is a portfolio manager at Foreign & Colonial Emerging Markets
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