External affairs rather than domestic issues are driving Asian economies, according to fund managers...
External affairs rather than domestic issues are driving Asian economies, according to fund managers.
Bob Hrabchak, fund manager at Credit Suisse Asset Management, says: "The downturn in the region is not being driven by current account deficits across Asia or spending by Asian companies, but by US demand for the region's goods and services."
He explains that the share prices of many companies throughout the region have been under pressure and are looking cheaper than they have for a long time. The situation looks set to continue, with US firms producing a series of profit warnings and fears of a slowdown in the global economy ahead.
While some US technology companies have said their earnings outlook was better than expected at the beginning of the year, Hrabchak says that for every good piece of news released, three other companies issue profit warnings.
"Valuations have been under pressure and are now at unjustified levels," he says. "Today's Asia is very different from when they were last at these levels."
During the Asian crisis in 1997 a number of the region's stock markets more than halved in value. But Asian companies are now believed to be in far better shape, having undergone vast restructuring since those events.
The emphasis is now clearly on shareholder value and producing decent returns on capital. The region's governments have also changed and are now running current account surpluses, according to Hrabchak.
He says: "There has been very little investment in Asia over the past three years, so you cannot really say overcapacity is a concern. There has also been a lot of consolidation."
Richard Scott, manager of Exeter Pacific Growth, says the big uncertainties last year revolved around how far inflation was increasing, whether interest rates would have to go up and whether economic growth was too strong. "This year, it is very much the reverse, with fears of a hard landing in the US causing a global setback," he says.
Scott believes there will be a soft landing in the US because the Fed has considerable scope to reduce interest rates, which will help the economy. In addition, corporate bond spreads across the world are quite high in comparison to government bonds, reflecting current fears about a looming recession, he explains.
"People will begin to believe a recession can be avoided, and so those risk premiums and bond markets will come down," he says. "This is important for Asia because one of the restraints on growth is the ability of firms to borrow."
Scott expects corporate profits in Asia to begin to pick up as the year progresses.
Graeme Bamping, head of investment communications at Merrill Lynch Investment Managers, also predicts a soft landing for the global economy and is therefore relatively bullish on Asia-Pacific markets. He also predicts an improving liquidity outlook, which he says will benefit the region it tends to outperform in rising markets in the event of an interest rate driven rally in the US.
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