Following the sharp declines in Asian equities of the past weeks, we believe any further share price...
Following the sharp declines in Asian equities of the past weeks, we believe any further share price corrections would be good for the financial health of the region and create opportunities for investors.
The recent market falls were a continuation of a trend that began during the last quarter of 2007. For most of the year, investors injected huge amounts of capital into Asian stockmarkets, despite rising raw material prices and concerns over the trickle-down effect of the sub-prime crisis.
As investors sought to take advantage of the region's strong economic fundamentals and long-term potential, money was channelled indiscriminately into both good and poor-quality companies. Cyclical and heavy industrial sectors benefited as investors pinned their hopes on global - and in particular, Chinese - demand for commodities and energy.
The phenomenal and speculative rise in share prices was, of course, unsustainable, and valuations became overly stretched. The global credit crunch finally sparked a significant sell-off of previous high flyers during the fourth quarter of 2007.
Given an uneasy global market environment, 2008 is likely to be a much tougher year for Asian equities, and investors need to be alert to a number of risks.
Firstly, the increasing possibility of a US recession. Although domestic-fuelled growth is an emerging long-term theme in Asia, the region has not decoupled from developed markets. Consequently Asia's export-related companies may be impacted by a slowdown in the US.
Secondly, despite recent share price falls, unsustainable disparities remain in valuations both between and within markets. In particular, Chinese stocks and many cyclicals are still factoring in 'blue sky'.
Thirdly, inflation ticking up almost everywhere may lead to policy responses that do not turn out to be the right ones. Rising costs are also impacting companies.
- Indiscriminate buying saw Asian assets overinflated in 2007;
- There are now buying opportunities in good-quality stocks;
- Asian economies remain strong, though caution is advised.
By Hugh Young, managing director, Aberdeen Asset Management Asia.
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