By Christian Dangerfield, CIO at Govett Asia I have a clear memory of arguing in the autumn of 1...
By Christian Dangerfield, CIO at Govett Asia
I have a clear memory of arguing in the autumn of 1998 that Asian equity markets couldn't get any worse. I was right, up to a point. Things didn't get any worse but, more than four years on, nor have they got noticeably better.
The MSCI Asia Free ex-Japan index is today trading at much the same level as it was when I made that confident prediction. Of course, there have been mini-cycles within that time ' markets have doubled and halved and some have doubled again ' but today these markets are trading at much the same level.
If there is an investment case for Asia, it is one based on demographics and, by extension, cost. As the West's baby-boomer generation moves towards retirement, the peak of Asia's demographic bell-curve is barely out of short trousers.
Put simply, Asia has a larger, younger, cheaper and more productive workforce than anywhere else on the planet ' and they've only just discovered credit cards.
A Hong Kong-listed, Chinese-based garment manufacturer told me he had recently won orders from Wal-Mart that will be worth more than $75m to him over the next two years. With annual sales of $50bn, Wal-Mart currently outsources only about $5bn worth of its total production.
Despite additional transportation costs, he estimated his final costs to Wal-Mart were around 15% cheaper than those of potential competitors in Mexico, due to production efficiencies and a lack of pilfering from the factory floor.
There are many companies like this, listed in Hong Kong or, indeed, Singapore but leveraging off low costs in mainland China. Companies like Texwinca, Yue Yuen, Fountainset, Victory City, Top Form and Leefung Asco.
You may not have heard of them yet but I wouldn't be surprised if some, if not all, end up as components of the Hang Seng or Straits Times indices within the next three years.
They produce items as diverse as micromotors for BMWs, educational books for the US school boards, underwear for Marks & Spencer and Carrefour and trainers for Nike.
Many trade on earnings multiples of less than 10 times. They have little or no debt and very positive free cashflow so are able to pay out dividends of more than 5% and, in some cases, as high as 10%.
Their revenues are likely to grow 10%-20% per year for the next five years at least. With leverage accruing from economies of scale, that will translate into earnings growth of 20%-30%.
If anything, China's growth will accelerate in certain areas of the economy in the next two to three years due to further structural reform.
Financial reform will, of course, translate into increased equity market opportunities for foreign investors, although the Chinese H share market arguably already contains a large number of highly attractive listed companies, particularly in the mid-cap area.
Currently trading around 90% below its level in 1993, at the time of the last emerging markets euphoria, and on an earnings multiple of 12 times forward earnings, I wouldn't bet heavily against China emerging as the next global asset bubble over the next few years.
Structural reform will lead to growth in China.
Asia has a large, young, cheap workforce.
Many outsourcing firms have good potential.
China may emerge as a global asset bubble.
Geopolitical concerns wil create instability.
Markets have been volatile.
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