The Far East ex-Japan equity makret is still sensitive to the export cycle, but is benefiting from r...
The Far East ex-Japan equity makret is still sensitive to the export cycle, but is benefiting from rising competitiveness and a robust infrastructure.
The recent West Coast docks strike illustrated the region's dependence on trade to the US. The powerful dockworkers union staged a lockout to protest against increasing technology, and ships from the Far East were stranded on the high seas.
The action caused a huge jam in terms of Pacific exports until President Bush intervened to call for an 80-day cooling off period.
The problem could return to affect Far East exports once that period is over, according to Gayle Schumacher, head of research at Coutts.
'In the past, the management and union have often failed to come to an agreement,' she says.
While the Far East is dependent on the US, it is becoming less so, and other markets such as Europe are more dependent, according to Schumacher.
In the last three to four years, domestic demand has emerged in the region providing a cushion against the export cycle and supplementing growth.
At the same time, the Far East has become increasingly competitive and is winning US market share from Europe.
China is a major factor in this ' many global firms are moving production there because of cheap labour costs.
The move of market share towards China will have strategic implications for Europe and Latin America but could also start to affect other countries in the Far East in terms of US market share, according to Schumacher.
The recent terrorist bombings in Bali will affect areas dependent on tourism, she adds.
'It is definitely negative for the region,' says Schumacher. 'It is catastrophically bad for Bali and other areas where tourism is a main revenue earner.'
But she believes the damage will be short lived outside Indonesia if there are no further attacks.
The Far East is Coutts' preferred equity market because of cheap valuations and a flexible economic model, says Schumacher.
The downside is that it is exposed to war risk and it is more dependent on imported oil than other regions, she adds. Despite the cushion of growing domestic demand, the region is also heavily dependent on US exports.
Cedric van Rijckevorsel, chief financial officer of hedge fund firm Altin, is underweight the Far East ex-Japan. He believes Far East markets are holding up well compared with other markets around the world.
'A rebound situation will not help them as much as Europe,' he says. 'If the markets rebound, we would rather be in another market than Asia.'
Another reason the fund is underweight the region is the difficulty in shorting stocks.
Only the mature markets such as Singapore, Hong Kong and Australia can really be shorted, he says.
Fund manager comment: Threadneedle
Asia seemed to be well on the road to recovery but now faces the prospect of a relapse as its neighbours are looking distinctly unwell.
The results of Asia's recuperation were evident in the economic data over the last few quarters. This was driven by a recovery in exports and by the strength of domestic demand across a number of regional markets, notably Korea and Thailand. The Chinese power house has also moved into top gear and is now a major engine of intra regional demand.
However, the region is now facing a renewed challenge as the key markets for its products, particularly for information technology, are struggling. Export growth rates are beginning to soften as a result.
The question is, how the Asian consumer will react faced with this weak external environment? An increased propensity to spend and easier availability of credit, coupled with historically low interest rates, mean the consumer may provide more of a support for growth than in the past.
But Asia is not being given the benefit of the doubt. Concern over prospects for growth in the major markets has mounted at the same time as risk aversion has risen giving global security worries. This has resulted in heavy foreign selling across the region, particularly in markets and stocks where investors had made profits earlier in the year.
Asian assets are now very attractive. Structural improvements are not reflected in the equity markets as the region is caught up in the global sell down. Asia has become a net creditor to the rest of the world as reserves have been rebuilt through current account surpluses. Corporate governance and shareholder value have also been a focus for some time.
Kirsteen Melandri is fund manager at Threadneedle
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