In spite of heightened volatility and global concerns, Asian markets have stood up relatively well t...
In spite of heightened volatility and global concerns, Asian markets have stood up relatively well to the threat of contagion caused by the US sub-prime crisis. Corporate debt is at much lower and manageable levels, while earnings continue to be strong with higher rates of return on equity available across the region compared with 1997. Return on equity for the region is running at an average of 15%.
Against a relatively strong earnings backdrop, the region trades on around 17 times 2008 earnings and the dividend yield is around 2.5%. These numbers are not as cheap as those of a few years ago, but remain within historical ranges.
We have also seen much more talk of the ability of Asia to decouple in terms of economic growth, which we believe to be correct to a degree. Instead of looking at the history of the correlation between US economic and Asian economic growth, and indeed the market performance of the two areas, investors are looking at the fundamentals as they exist now. Simply put, Asia now has more internal growth drivers than in its US-dependent past. However, it is important to note that any slowdown in the US economy will have an impact on Asian economies, with the US remaining Asia's largest trading partner.
We are relatively sanguine about prospects for the Asian region on a medium to long-term view. There are short-term concerns, however, as valuations are currently at a premium to other areas of the world. Of particular worry is China, and to a lesser degree, India. In some areas in China, P/E ratios are close to 70 times earnings. Therefore, we believe it may be more difficult for markets to outperform to the extent seen recently, and if that is the case, careful stock selection will become even more essential in the short term.
The global macroeconomic picture is generally favourable and Asian growth remains superior, but there are obvious signs that global growth will slow, and this is sure to have an impact on the region. However, Asia has its best chance since the early 1990s of remaining resilient in the face of a global slowdown. These are exciting times for Asia, but we need to be aware of both the dangers and opportunities.
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