The performance of Far Eastern stock markets has been disappointingly poor for the best part of this...
The performance of Far Eastern stock markets has been disappointingly poor for the best part of this year. Indeed, along with China, the only Pacific region stock market to record a gain over the second quarter was Australia, with the FTSE Australia index up a highly respectable 11.8%, in local terms.
Traditionally regarded as the region's most defensively oriented stock market, Australia is benefiting from strong macroeconomic fundamentals that are encouraging investors to buy into the resources and basic industries sectors and also into domestic orientated stocks, particularly financials.
Meanwhile, China has been delivering strong returns as it benefits from the onset of what may turn into a period of strong economic growth. The rest of the Pacific region has struggled to overcome the fallout from Nasdaq and worries over a US economic slowdown.
However, after the 50 basis point interest rate rise in May, US interest rate fears have subsequently eased ever since due to the release of weaker US economic data.
This has allowed the Nasdaq to stabilise, and has encouraged investors tentatively back into Asian stock markets. This has resulted in good recoveries being staged over the last few weeks by Hong Kong and Korea in particular. However, country-specific issues continue to weigh on investors minds.
In Hong Kong the real estate sector is suffering from fears of oversupply due to government policy, while in Korea, Hyundai, the country's largest industrial group, faces mounting liquidity problems, which periodically provoke renewed fears of another financial crisis. Such factors have the potential to affect sentiment in the future.
For a sustained recovery, Asian stock markets must rely on renewed interest in the region's technology stocks, and on the continuing beneficial effects from corporate and economic restructuring.
Against the uncertainties currently facing technology stocks, and the slow pace of corporate restructuring in Asia, Australia's attractions are strong.
It has good economic fundamentals, it is the least volatile of the region's stock markets, and companies are well run, cheap, and deliver stable earnings.
The macroeconomic background in China is more favourable now than it has been at any time in the past five years, giving it the potential to become a major driver for Asian growth.
With US interest rate and economic growth expectations unsettled, we have taken a cautious approach towards Pacific stock markets in our portfolios for the short term. A holy trinity of cash, Australia, and the region's best technology stocks, has become our main investment theme. This has led to an overweight position in Australia, and Taiwan and India.
Roger Ellis is the joint fund manager of the FF-Fleming Pacific Technology Fund
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