Despite attractive valuations and a fast potential growth curve, the Far East remains entirely tied ...
Despite attractive valuations and a fast potential growth curve, the Far East remains entirely tied in to what is happening in the world economies.
Vanessa Donegan, head of the Asian desk at Zurich Scudder, says: 'It is presently very difficult in the Asian markets. The Far East is waiting for global growth to pick up before it will improve.
'No-one knows when global monetary policy is going to kick in as we have yet to see if earnings are picking up.'
Donegan explains that local Asian investors are not investing in equities in the Far East but rather putting their money into deposit accounts.
Michael Watt, director of Pacific equities at Henderson Global Investors, says: 'What happens in the Far East depends on what is happening in the US.'
Watt warns that leading economies like the US have fallen more than expected and there are concerns unemployment may rise because of this. If unemployment rises in Asia, consumers may stop spending and the market may fall further.
Donegan says in Asia valuations are looking very attractive, liquidity is good but there is not much interest in the market.
Donegan's preferred market in the region is Australia. She says: 'Government policies should lead to a recovery in the economy, there is fiscal stimulus, the currency is undervalued and company managers are getting the best returns.'
For example, beer manufacturer Fosters has recently purchased a US wine company and banks are diversifying their interests overseas. The government is providing initiatives such as housing grants for first- time buyers to help kick start the economy.
Donegan also likes the banking industry in Korea because it is relatively undervalued and the larger banks are reasonably well run. The recent merger of Kookmin Bank and Housing and Commercial Bank has helped support the industry.
Watt has overweight positions in North-East Asia as they will benefit from a resurgence in exports when the economies start to pick up.
Henderson favours China and Korea because valuations are very low. Korea has increased corporate governance and corporate growth has been helped by an increase in interest rates.
In China big changes are happening because of preparations to join the WTO and the Olympics will open up the economy to the global market.
Watt has positioned his portfolio to what will recover when the global economies turn around.
fund manager comment: Gartmore
In recent months, equity markets appear to be reacting dramatically to negative corporate newsflow ' a complete reversal of their behaviour at the end of 1999 when mildly favourable news translated into a huge rise in share prices culminating in a spectacular rally. Of course, we cannot deny the reality behind the recent series of negative news but most share prices are already discounting a sharp decline in earnings and the scope for further downgrades appears limited. Another positive factor is that companies in many sectors, especially technology, have begun to cut production capacity. This painful admission of defeat, in our opinion, is the first step to ensuring healthier growth in the longer term.
In this difficult environment, the most important strategy is to identify winners and losers correctly. While weak and inefficient companies will be eliminated as competition intensifies, companies that are capable of offering lower prices by improving efficiency will survive difficult times.
Within the technology sector, many leading companies in the US, Europe and Japan have announced a reduction in production capacity in such areas as DRAM and flash memories. This should benefit many Far Eastern technology companies such as Taiwan Semiconductor Manufacturing and Korea's Samsung Electronics by easing price competition. Weak local currencies will also help and we are optimistic the turning point for share prices is close ' in any event, the downside risk appears limited from here.
Another area where share prices have been battered indiscriminately is the resources sector. However, capacity is also falling in these industries and industry consolidation is helping to reduce any excess. All these factors should pave the way for higher commodity prices and a brighter future for Far Eastern resources companies such as Australia's BHP Billiton and Chinese oil company CNOOC, which are likely to emerge as winners.
Margaret Gadow is senior investment manager at Gartmore
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