Invesco favours China, India and Korea
Investment officer Paul Chan sees better mid- to long-term prospects from China and India shares, but is looking for opportunities to gain from a contrary view on Korea.
China, India and Korea are InvescoÆs biggest overweight positions in Asia, a region that the fund management company considers a æbright spotö amid all the gloom surrounding the US economy.
ôDespite a potential global slowdown, we do not expect Asian exports to drop significantly in the near-term,ö says Paul Chan, Asia ex-Japan chief investment officer at Invesco Hong Kong, adding that Asian exporters donÆt rely solely on the US, having penetrated Europe and the Middle East. Invesco, a global investment management company that operates in 20 countries, has around $500 billion in global assets under management.
Chan notes that Asia will inevitably be affected by macroeconomic pressures, but will be able to withstand the external shocks because of strong fundamentals.
Asia ex-Japan has accumulated foreign reserves of around $2.5 trillion since the Asian financial crisis 10 years ago. ChinaÆs own foreign reserves make up more than half of the regionÆs total reserves at $1.43 trillion. Asian central banksÆ foreign exchange reserves are well above total external debt across the region, except in Indonesia, Korea and the Philippines.
ôThis snowballing reserve acts as a buffer against external financial shocks,ö says Chan.
In line with general expectations, Invesco reckons the US Federal Reserve will continue its monetary easing policy, which will widen the interest rate-spread between Asia and the US, encouraging capital to flow into this region. Liquidity conditions are supportive of the reflation of AsiaÆs domestic economies, bringing benefits to the domestic-related sectors.
From a regional asset allocation perspective, Invesco expects better prospects from India and China in the medium- to long-term. Sector-wise, Invesco favours financials, information technology, industrials, energy and materials.
While valuations of Indian shares are not as cheap compared with historical levels, Invesco considers them fairly valued. The price-to-earnings ratio is at 21 times forecast earnings for 2008, which is well-supported by strong earnings growth of at least 20%, Chan says.
ChinaÆs economic growth story is still its main draw. Chan expects a gradual pickup in the pace of renminbi appreciation this year, which will continue to attract liquidity inflows into its equity markets. The Olympics in Beijing is also expected to continue to boost domestic sentiment. Inflation remains a key worry in China, but one that Chan expects to be manageable.
ôWe believe inflation pressure will remain acute in the near term. The acceleration of inflation has fuelled speculation of an imminent hike in interest rates by the Chinese authorities,ö Chan says.
InvescoÆs outlook on Korea is somewhat contrary given that many fund managers are staying away from this market, which Chan considers to be ômisunderstoodö at the moment.
ôWe like Korea because of its fundamentals and because the government will be introducing favourable economic policies such as lower consumption tax, which will help support that marketÆs domestic consumption story,ö Chan says.
ôThe general perception is Korea is US-centric and US-dependent and is linked mainly to the US through technology products, but thatÆs not the case. What we are trying to do is find a way to take advantage of that misperception.ö
KoreaÆs economic growth is balanced between domestic demand and net exports, and this will serve as a cushion for external shocks. Chan notes that KoreaÆs gross domestic product is made up of 10% net exports, 12% government consumption, 28% capital expenditure and 50% private consumption.
ôDespite a potential global slowdown, we do not expect Asian exports to drop significantly in the near-term,ö says Paul Chan, Asia ex-Japan chief investment officer at Invesco Hong Kong, adding that Asian exporters donÆt rely solely on the US, having penetrated Europe and the Middle East. Invesco, a global investment management company that operates in 20 countries, has around $500 billion in global assets under management.
Chan notes that Asia will inevitably be affected by macroeconomic pressures, but will be able to withstand the external shocks because of strong fundamentals.
Asia ex-Japan has accumulated foreign reserves of around $2.5 trillion since the Asian financial crisis 10 years ago. ChinaÆs own foreign reserves make up more than half of the regionÆs total reserves at $1.43 trillion. Asian central banksÆ foreign exchange reserves are well above total external debt across the region, except in Indonesia, Korea and the Philippines.
ôThis snowballing reserve acts as a buffer against external financial shocks,ö says Chan.
In line with general expectations, Invesco reckons the US Federal Reserve will continue its monetary easing policy, which will widen the interest rate-spread between Asia and the US, encouraging capital to flow into this region. Liquidity conditions are supportive of the reflation of AsiaÆs domestic economies, bringing benefits to the domestic-related sectors.
From a regional asset allocation perspective, Invesco expects better prospects from India and China in the medium- to long-term. Sector-wise, Invesco favours financials, information technology, industrials, energy and materials.
While valuations of Indian shares are not as cheap compared with historical levels, Invesco considers them fairly valued. The price-to-earnings ratio is at 21 times forecast earnings for 2008, which is well-supported by strong earnings growth of at least 20%, Chan says.
ChinaÆs economic growth story is still its main draw. Chan expects a gradual pickup in the pace of renminbi appreciation this year, which will continue to attract liquidity inflows into its equity markets. The Olympics in Beijing is also expected to continue to boost domestic sentiment. Inflation remains a key worry in China, but one that Chan expects to be manageable.
ôWe believe inflation pressure will remain acute in the near term. The acceleration of inflation has fuelled speculation of an imminent hike in interest rates by the Chinese authorities,ö Chan says.
InvescoÆs outlook on Korea is somewhat contrary given that many fund managers are staying away from this market, which Chan considers to be ômisunderstoodö at the moment.
ôWe like Korea because of its fundamentals and because the government will be introducing favourable economic policies such as lower consumption tax, which will help support that marketÆs domestic consumption story,ö Chan says.
ôThe general perception is Korea is US-centric and US-dependent and is linked mainly to the US through technology products, but thatÆs not the case. What we are trying to do is find a way to take advantage of that misperception.ö
KoreaÆs economic growth is balanced between domestic demand and net exports, and this will serve as a cushion for external shocks. Chan notes that KoreaÆs gross domestic product is made up of 10% net exports, 12% government consumption, 28% capital expenditure and 50% private consumption.
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