With markets around the world dropping like ninepins, investors must be wondering whatever happened ...
With markets around the world dropping like ninepins, investors must be wondering whatever happened to Asian decoupling. The answer could be that Asia has not really decoupled (there is much debate about the global exports and their eventual destinations), but it is more likely that investors are simply cashing in profits where they have them. One cannot argue with the urge to lock in profits, but it is worth examining whether Asia is really the right region to be selling by looking at how companies prepare for a recession.
Firstly, they cut any capital expenditure regarded as 'non-essential' - that ambitious factory extension may be curtailed or possibly even cancelled, but if it does continue, it will be equipped with cheaper machinery - a trend detrimental to German and Japanese machine manufacturers and favouring low-cost machinery and locations.
If the company does have enough cash on hand (a quick and dirty screen revealed 225 Asian companies holding over 25% of their balance sheets in cash), it may buy competitors to improve purchasing/pricing power and alleviate margin squeeze. For those with less ready cash, the sale of non-core assets offers a way to improve both balance sheet and margins. Again Asia's typically conglomerate company structure will fare better than the already 'right-sized' structures of the West.
Turning to the core business, if Asian goods typically cost around 40% of those made in the US or Europe, what company would not increase its outsourcing, when the cost reductions could mean the difference between corporate life and death? The US ISM Import Intentions survey shows outsourcing has typically grown rapidly during Western recessions and is far from saturation.
Asian stockmarkets, of course, should not be confused with Asian economies. In times of global financial panic, all countries move in tandem, but if the moves on Wall Street are more considered, Asia can and should outperform.
During recent panic our fund has bought stocks on P/E ratios of 5x yielding in excess of 12%. It is clear that extraordinary opportunities abound in Asia - for those calm enough to take them.
- Falls in Asian markets may simply be down to investors taking profits where they can;
- A global recession could favour Asian companies, which have lower cost bases and more ready cash;
- There are good opportunities in Asia for those calm enough to take them;
- Sally Macdonald, manager, Melchior Pan Asian Opportunities fund.
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