Ten years on from the 1997 financial crisis which hit the region, most of Asia's equity markets have...
Ten years on from the 1997 financial crisis which hit the region, most of Asia's equity markets have recovered spectacularly. Indeed, in 2006, despite blips in May and June, the MSCI AC Asia Pacific ex Japan index gained around 33% in US dollar terms, compared with a 20% gain by the MSCI World Index. Re-ratings of Asia's stock markets saw India, Singapore, Hong Kong and Australia post record high returns during the year.
"The macro-economic environment across Asia remained healthy in 2006, with growth becoming increasingly broad-based," says Hugh Young, manager of Aberdeen's New Dawn Investment Trust. "Encouragingly, the region's fortunes have shown more signs of being driven by intra-regional trade, with China continuing to be a key source of demand. The main risks to Asian equity markets now appear external, with worries about the severity of a possible US economic slow-down uppermost in investors' minds."
Young adds: "Although its economies have increasingly de-linked from the US, a sharper-than expected slowdown in the latter is bound to have an effect on Asia, particularly for the more export dependent countries. Nevertheless, Asia's generally healthy current account surpluses and resilient domestic consumption have provided an adequate buffer so far against the effects of slowing US growth."
Young says his portfolio remains split. On one hand it comprises companies benefiting from the rise of the domestic consumer, such as China Mobile, and Hong Kong-based conglomerates Jardine, and Swire Pacific. But he says they are complemented by weightings in some multinationals, such as Korean technology company Samsung and Australian mining company Rio Tinto, that should continue to be robust despite a moderation in global growth.
The two giants of the region - India and China - continue to dominate. Average wages in China have doubled in the last five years, which has created an affluent urban population. Meanwhile, India has an expanding middle-class, highly-educated workforce of its own. It is a trend that makes the area attractive, according to Andrea McNee, chief investment officer of international equities at Resolution Asset Management.
She says: "Within the region the best opportunities lie in domestic sectors. Household income levels are rising, and interest rates are low and set to go lower, particularly in south-east Asia. This sets the scene for strong consumer spending."
However, she sees a number of key risks, not least the assumption that the US will experience a mid-cycle slowdown and that interest rates will fall in the second half of the year. "Asian markets are at record highs and risk appetite indicators such as emerging market bond spreads indicate high levels of risk-taking. That leaves markets vulnerable to tactical correction," McNee warns.
Political influence in the region will also play a major part. Thailand's uncertain political situation has already created risk for investors, while the economies of Taiwan, Korea and Malaysia will be strongly affected by politics.
Indeed, a presidential election in Korea in December 2007 could bring a major boost to the country. The Korean stock market had a flat 2006, which has left Korean stocks valued lower than others in the region.
With an election ahead, it is expected there will be economic boosting measures during the year which could make the undervalued stocks look even more attractive.
China continuing to be a key source of demand
US slowdown a risk for Asian equity markets
Political influence in the region expected to impact
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