It's old hat already to say Asia is recovering. But just how fast are economies pulling through? A m...
It's old hat already to say Asia is recovering. But just how fast are economies pulling through? A mixed picture is now emerging
Former tigers like Korea, Taiwan and Singapore are benefiting from a strong cyclical rebound led by manufacturing exports. Investment and productivity is up, business confidence has recovering and a strong yen is underscoring demand
However, in the past two months, markets have generally retrenched as external threats the fear of rising US interest rates, yen strength and tech-led Wall Street jitters point up weaknesses at home. Some of this is sentiment led. Markets ran up too quickly through the second quarter. A measure of the new mood is that companies have returned to the IPO and rights issue trail but investors have become a lot more discriminating
But the old adage of 'buy on weakness' holds good. Earnings growth is coming through strongly and there are signs that manufacturing over-capacity is being wound down. At the macro level, currencies look a lot more stable now as balances have moved strongly back into surplus
In short, the cyclical bounce looks real. The big boost now is coming from domestic consumption. In the past two quarters, the effect of higher spend- ing has been marked, most noticeably in Korea and Singapore
This has even led some to suggest that interest rates may have to rise. But price pressures are muted and productivity is outstripping wage growth. Governments will not want to exacerbate upward movement in currencies; they also want to keep monetary policy low to stimulate credit growth
Our emphasis remains on Southeast Asia despite financial and corporate restructuring issues. Malaysia is attempting to force through a shotgun marriage of its banks; Thailand has failed to provision against non-performing loans and banks are desperate to recapitalise and the Philippines is too reliant on political-business groups
Indonesia is in a class of its own having alienated the international community with its cynical treatment of East Timor. Its banking system, rocked by a corruption scandal, is on life support. Meanwhile the military is trying to wrestle control as President Habibie falters
Against all this markets look increasingly cheap. The same cannot be said in northeast Asia where governments continue to talk up stocks. Fear of devaluation in China has led direct investment to dry up; joblessness arising from the closure of state enterprises has increased savings while public spending remains poorly directed. A rise in markets will, the government hopes, encourage spending
Outside a dedicated fund, China remains a no-go area. Hong Kong appears stifled by high real interest rates and market sentiment is weak. The scope is there for a liquidity-driven rally but when this happens is another thing. Taiwan is a buy, although we are very stock specific. Korea has back-tracked sharply since the extent of the chaebols' use of retail investment funds to prop up investment affiliates came to light
It is still unclear how far the government is prepared to face down big business since reform will inevitably lead to unemployment and dent its own popularity
Markets may track sideways for a while. They seem distracted as the true extent of structural problems and the drag on growth resulting from non-performing loans sinks in
Our focus is on companies with sound balance sheets and secure market franchises rather than restructuring stories or market specific rallies
Peter Hames is investment director at Aberdeen Asset Management Asia
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