By Mearns Nimmo, director Far East equities at Friends Ivory & Sime With exports accounting for...
With exports accounting for 20%-100% of GDP, Asia is clearly vulnerable to global economic conditions. This is the main reason the region's stock markets have performed so poorly over the past two years.
Years of surging investment in telecoms hardware, much of it from East Asia, are over. Factories are operating at well below capacity and dynamic random access micro (Dram) computer chips have become just another commodity, of which there is significant excess supply.
However, at some stage, the drastic reduction in interest rates we have seen in the US, together with the US government's fiscal stimulus, will have an effect. We expect that in the middle of 2002, investors will be anticipating a recovery in the global economy. Large amounts of cash that investors in the region presently have on deposit will therefore probably return to stock markets. This should happen in advance of the actual turnaround. In fact, there are companies and sectors where investors are already looking for a marked improvement in conditions. During October, the leading computer chip 'foundries' in Taiwan predicted their sales would pick up early next year. This provided a boost for many of the regional technology groups after what has been a tough period.
One crucial aspect of the region is that China's economy is much larger now, in both relative and absolute terms, than it was a decade ago. Thanks to its accession to the World Trade Organisation, China should attract huge amounts of foreign direct investment in coming years that would otherwise have gone elsewhere. Some of the biggest investors in China will be Taiwanese and South Korean corporations.
Chinese investors also have large amounts of cash and few places to invest it. As a result, shares in the Chinese stock markets that are reserved for local investors have traditionally traded at very high prices and valuations. One of the features of this year has been the flow of money into Chinese shares that have traditionally been reserved for foreigners, with these shares soaring as a result. We expect the Chinese government to continue to liberalise its financial markets.
Potential losers from the growth within China are Thailand, Malaysia, Indonesia and the Philippines. Companies in these countries that take advantage of cheap local labour to manufacture exports for global markets will increasingly find they are competing with Chinese rivals. Hence, 2002 may well be the year in which regional investors begin to focus on the Chinese challenge to South East Asia.
In addition, next year could see Australia's stock market playing a new role in the context of the Asia Pacific. While Australian stocks provide access to both an economy and individual firms that are expanding relatively quickly, they can also make a regional portfolio more stable.
Asian markets will continue to be volatile in the short term as the negative effects of excess supply of goods and services battle the positives of excess liquidity. Political problems continue to linger in the smaller markets such as Thailand, Indonesia and the Philippines.
However, the Asia Pacific market should be a strong performer once the global economic cycle starts to improve.
Region is highly geared to a global recovery.
China to gain from accession to WTO.
Australia offers stability and growth.
Firms face probllem of excess supply.
China could be bad news for other regions.
Political problems linger in smalll markets.
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