By Andrea McNee, an investment director at Britannic Asset Management Asian markets have rallied...
By Andrea McNee, an investment director at Britannic Asset Management
Asian markets have rallied strongly from their lows and many commentators are suggesting that this really could last until Chinese New Year.
The recovery in the US economy post-11 September gave way to a fear that Asian export growth would slow to a very modest pace in 2003. Likewise domestic demand in Asia would also lose momentum.
Economists and company analysts alike reviewed and cut forecasts, with downgrades peaking in September/October. The technology sector in particular felt the pain, with recovery postponed once more until the second half of 2003 when it is hoped corporates will start spending again.
In October, market forecasts of US corporate profits growth reached much more reasonable levels, (expected growth rates in the tech sector fell by 30% from almost 50% at end August to 19% end October). This removed one of our concerns that market expectations were too high.
Equity markets in early October were very pessimistic. However, on looking at what markets were pricing in, it became clear they were pricing in both the recent downgrades and a contraction in growth.
Another way to look at valuation is to conclude that in fact the markets were priced for a low return, low growth world, and expectations of near term profit growth had been pulled back to a more reasonable level. Therefore markets were just as vulnerable to an upside surprise as a downside one.
In the end, it took a better than expected quarterly reporting season from the US, the removal of the immediate threat of war, and the anticipation of further interest rates cuts by the Fed to remove the gloom.
In Asia, the bounce was led by the technology sector helping Taiwan to rally 25%. However Korea's performance was held back by poor results from banks and credit card companies ' the legacy of over ambitious credit expansion signalling an end to Korea's consumer boom.
Instead, the focus has reverted to Hong Kong where expectations were low, but where there is evidence that corporates are learning to cope with deflation.
There is also the benefit of having China on its doorstep. Decent profit outcomes have been achieved. In general South East Asia has lagged, partly due to a re-assessment following the Bali bombing and partly because these markets had not fallen as much.
Despite the recent rally of 15%, a valuation case can still readily be made for Asia. Liquidity in the region is strong and in some countries interest rates can follow the Fed down. With a fair wind, another 10% or so upside is achievable.
However, at this stage stock selection becomes more critical, especially in the technology sector. For a meaningful move up, markets need more positive news on trading, leading to upgrades, leading to corporate profitability. We may need to wait until later in 2003 to see this.
The main risk as ever is the US consumer ' can he continue to keep spending until balance sheets are repaired and corporates increase capital expenditure?
Global growth outlook is soggy.
Extreme underpricing removed by a rally.
Domestic demand is too cool in Hong Kong.
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