By Mike Hanbury-Williams, director of Pacific Basin equities at RSA Investments The Far East has...
By Mike Hanbury-Williams, director of Pacific Basin equities at RSA Investments
The Far East has been acting as a warrant on global stock markets in recent months. Japan is the notable exception, still weighed down by economic woes and the government's inability to tackle the bad debt crisis.
Elsewhere, markets have reacted strongly to the first hints of economic recovery. Taiwan and Korea have led the way, both up by more than 60% from their September lows, with the hardware-dominated technology sectors at the forefront.
Many stocks in Asia have now done too much. Some tech stocks, for example, are already trading back close to bubble valuations and fully discounting the most optimistic of scenarios. Memories seem to be extremely short. A lot of these companies still have perilous balance sheets that will inhibit longer-term growth.
Despite the rally, Taiwan stands out as the best value market in North Asia. Liquidity, an important driver for the Taiwanese market, is about to improve sharply as post office deposits mature. Financial sector reform is also set to unlock some interesting opportunities.
The tech names in Taiwan have also run too far, so we are concentrating primarily on the domestic sector, including banks and insurance companies.
Thailand and Indonesia are currently offering good value. Smaller Asian markets lagged in the recent rally as investors sought out large, liquid markets and valuations are now cheap in these areas, whether looked at on a return-on-equity or price-to-earnings basis.
Japan, by contrast, continues to disappoint. Valuations look reasonable, especially in some cyclical areas that have ignored the move in the rest of the world. But what will act as the catalyst to spark a re-rating?
The second half of the year holds more promise. A global recovery has historically led to sharp improvements in industrial production and profitability in Japan. We see no reason why it should be different this time.
Value can still be found in mid and small-cap areas. Nissan Kogyo, for example, is the biggest brake manufacturer in the world. Closely linked to Honda, the company is experiencing rapid growth, has strong returns on equity and is exceptionally well managed.
Another example is USS, a manager of used-car auction facilities. Small companies such as this have the prospect for significantly above-average (in the region of 20%) earnings growth and we believe that in a low growth, low inflation environment, investors will continue to pay a premium for consistent earnings growth.
In terms of the outlook, we are generally quite cautious in the very near term. Markets have come a long way and valuations generally do not look cheap, although this may be a function of analysts being slow to raise their earnings expectations, just as they were slow to lower them on the way down.
A number of Asian companies have been making genuine attempts to reduce their cost bases. Even small increases in volume are likely to lead to significantly higher margins and profits. For the time being however, we expect a period of consolidation before Asian markets move ahead strongly on confirmation of an economic recovery in the second half of the year.
Taiwan and Indonesia up more than 60%.
Increased liquidity to be unlocked in Taiwan.
Thailand and Indonesia attractive valuations.
Tech stocks already at 'bubble' valuations.
Japan continues to disappoint.
Valuations across the region still expensive.
Odds widened to 2/1
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