The Pacific region continues to offer mixed opportunities for investors, with correct country and se...
The Pacific region continues to offer mixed opportunities for investors, with correct country and sector allocation of paramount importance. Strong global growth continues to support the region, although investors need to examine local conditions carefully.
The Greater China region demonstrates this point. China is benefiting from strong exports at the same time as government reforms on the financial and corporate sectors are taking effect. The market has made a good rally, but with economic fundamentals looking good, this could well go further after the current correction. Prevailing valuations are moderate and good results will see further gains.
Hong Kong needs a prosperous Chinese economy to underpin its activities. Interest rates seem to be near their peak, and investors are starting to see through the threat of a rise in US interest rates. Recent GDP growth has appeared very strong, although this is largely due to weak 1999 data. Growth will probably plateau at around 4 to 5% next year, and prices should be more stable as deflation eases. However, the market will probably remain in a trading range for the short term and global movements in telecoms and technology will continue to exert influence. Telecoms and banks remain the more attractive sectors of the market.
Taiwan has had a lack of positive catalysts for its market, as demonstrated by the lack of political initiatives since the elections in the early summer. The administration and legislature are controlled by different parties leading to impasse. The economic fundamentals are sound, but with confidence fragile, any indication of slowing growth would not be favourably received.
Korea, the other major market in the region, has had relatively low inflow of liquidity recently, leading to higher than normal levels of stock price volatility. This will continue for the short-term, although we believe that government action will address concerns over the corporate bond market, corporate restructuring and the strengthening of weaker financial institutions in the medium term. Growth continues to be strong, fuelled by exports growth as a result of the strong global economy. Equity risk premia could fall and a liquidity driven rally becomes more likely. Chaebol and financial sectors remain the riskier end of the market and we prefer companies with minimal exposure to these.
For the region as a whole, the key areas are global interest rates and growth rates, with particular focus on the US. While it now looks like the US economy is heading for a soft landing we believe short-term interest rates will move higher in the US and also Europe.
Asia has not been high on many investors' buy lists as it is still vulnerable. While investors will probably not be adding to holdings in the short term, the medium term outlook for the region as a whole is improving.
Sam Lau is director of HSBC Asset Management Asia
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