Asia has seen sharp economic recovery so far this year. Notwithstanding the risks to the region pose...
Asia has seen sharp economic recovery so far this year. Notwithstanding the risks to the region posed by a sharp slowdown in US economic growth, the outlook for the region appears very good.
Major economies in the region are projected to deliver strong growth rate in 2000. A stronger Japanese economy would certainly be positive for Asian exports that have to date powered growth in the region. There are now some signs that personal consumption is recovering. Inflation has confounded the sceptics by remaining subdued in most of the region.
The strength and speed of the economic recovery in the region has meant that profits have recovered much more quickly than had been expected. As such corporate earnings forecasts continue to be upgraded.
Equity valuations have improved following the market correction in March and April. Equities in the region are inexpensive versus major markets on a price to earnings, enterprise value/earnings before interest, tax, depreciation and amortisation (EV/EBITDA), price to book and price to cash flow.
For example, South East Asian markets are now trading on a current P/E of about 17 times, much lower than the world P/E of about 28 times. Sector wise, the region's mobile communications and technology companies trade at a discount to those in major markets. The speed of the economic recovery has provided an excuse for some companies in the region to slow down their restructuring effort.
On restructuring activities in the region, there seems to be more talk than action. Companies are more likely to change their corporate culture when they are under pressure. The financial crisis did put enormous pressure on companies in the region to restructure.
As investors heard Asian companies talk about restructuring, they immediately rewarded these companies by buying up their shares long before they saw evidence of change. Their enthusiasm actually eased the pressure on companies, and this in turn has slowed down the restructuring process. South East Asian stock markets have seen extreme concentration, as a few stocks account for a significant weighting of market benchmark indices. For example, the five largest stocks in Hong Kong and Korea accounted for 69.0% and 50.2% respectively of the benchmarks.
This is partly the result of investors valuing a stock based on which industry it is in, rather than how efficiently the company uses capital and the return the company generates on the capital.
The danger is that some of these stocks, especially those under the technology, media and telecoms category are mispriced and this could encourage management of these companies to make poor investment decisions. Poor investment decisions can have a profound impact on an economy, as witnessed in Asia during the financial crisis.
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