After their buffeting last year by external headwinds, Asian economies have snapped back to life in ...
After their buffeting last year by external headwinds, Asian economies have snapped back to life in 2002. Stock markets across the region are up strongly, driven by an influx of liquidity, relative political stability and compelling valuations. A shift in global asset allocations by fund managers has further benefited the region, with Asia becoming a prime beneficiary of the inflows. Initially confined to liquid blue chips, the rally has since spread to better value second liners, favouring peripheral markets.
The current recovery is predicated on an upturn in exports, but domestic demand is providing a newfound balance to growth. Improving sentiment stems from a raft of tax cuts and public spending that governments implemented in the downturn. We think domestic-led companies will prosper over the next six to 12 months because of this supportive environment and recovering job confidence. By contrast, we're not that convinced that the exporters will lead recovery, though clearly Asia is leveraged to an improvement in global growth.
In Korea, a burgeoning credit story has unfolded, where consumers are being enticed into everything from credit cards to big-ticket items like autos and new houses. Meanwhile, personal spending has been brisk in countries like Malaysia and Thailand. In Indonesia, progress on economic reforms and relative political stability has improved the country's economic prospects.
Over in North Asia, China has maintained its growth tempo. Gross domestic product grew by 7.6% year-on-year in the 2002 first quarter after a robust 7.3% rate for the whole of 2001. While we remain bullish on the mainland's underlying fundamentals, there continues to be a dearth of quality at the company level.
We thus prefer to unlock China's potential via companies listed on the Hong Kong stock exchange.
While China's economic engine has stayed robust, Hong Kong failed to participate in the rally because of a structural reliance on property, with prices having halved in the past three years. Here, the biggest stumbling blocks have been share prices, especially in the property and banking blue chip stocks.
We are neutral on Hong Kong relative to the benchmark, and remain cautious over its near term outlook.
Going forward, the principal risks to Asia's recovery chances are a sharp jump in oil prices, foot-dragging by governments' on reforms and restructuring and a volatile US dollar. In the US, if earnings do not match the optimism factored into stock valuations, stock markets could be in for a sharp correction in the coming months. Renewed weakness in technology may be a foretaste.
Overall, we still find better value in the overlooked markets of South East Asia such as Thailand and Indonesia. These countries have obviously had their problems ' which aren't about to go away ' but we feel this has been more than reflected in equity valuations.
Furthermore, governments in these countries have put in place pro-active monetary and fiscal policies, at the same time luring in more private capital by stepping up restructuring activities and raising the standards of corporate governance.
Economic activity looks set to accelerate.
Growth in consumer credit has picked up.
China strong in macroeconomic terms.
Patience must be a watchword
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