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Aberdeen is particularly bullish over Singapore, Hong Kong and India while underweight in China, Korea and Taiwan.
The fund house offers a few explanations on why stock markets in Asia have fallen much more than those in developed markets even if economic growth remains fairly robust.
First, the falls must be considered in the context of how regional markets had performed not only last year but since 2003. Over the years the bull market had built up so much momentum that once it reality hit home, as it did by November, the markets were particularly vulnerable to a selloff.
Second, Aberdeen says Asian economies have not decoupled as some believe and that weak growth in the developed world will eventually have a serious impact on growth in the region û itÆs just taking some time to show up. The world is entering the second year of the crisis but it has yet to see recession in any of the Western economies. ThatÆs mainly because, so far, the crisis has been limited to the financial sector and has taken time to feed through to real final demand.
Third, in addition to the shock caused by the credit crisis, there has also been the shock of rising commodity prices, notably oil and gasoline. The reasons for the rise are complex, but the effects are obvious. Falling house prices, rising gas prices make people feel poorer, for example. As a result, spending falls, resulting in falling revenues for companies, setting off job losses, and leading to further cuts in spending û a vicious spiral of the worst kind.
Fourth, the sharp falls in stock markets likely indicate that Asian economies are far more vulnerable to rising inflation than their Western counterparts. Food and energy bills account for a high proportion of household expenditure. Belt tightening thus has a more severe impact here on final demand.
Aberdeen notes that investors should be mindful that things may worsen before they get better. After all, economic growth is being constrained and this would typically lead to a lowering of interest rates. Inflationary pressures are causing social unrest in Indonesia, Malaysia and Thailand, and the turnaround is not yet in sight, the fund house says.
The responses of Asian central banks to inflation pressures reveal the quandary they are in, Aberdeen notes. Some have raised interest rates to cope with inflation while others have increased reserve requirement ratios and implemented stricter lending controls. On top of that, policymakers are also now intervening to prop up currencies as a means to reduce imported inflation, a reversal of the trend seen 12 months ago. But on balance monetary policy appears excessively loose with real interest rates negative across the region.
Despite these problems, Aberdeen is not bearish towards Asian stock markets overall, noting that recent earnings releases have been satisfactory.
Looking ahead, rising input costs are expected to squeeze profit margins, especially with the export slowdown, Aberdeen says, and companies that have expanded too fast and those that did so with borrowed money are vulnerable.
Over time, this ôweeding outö of below par companies will provide the stronger companies with opportunities to strengthen their businesses further, buying assets at distressed prices and filling gaps left by those unable to expand, Aberdeen says.
The opportunity that Aberdeen sees factors in a three- to five-year view, with corporate activity picking up as valuations fall. The fund house notes that it is already seeing very reasonable prices throughout the region and prudent investors who follow the fundamental principle of buying decent companies cheaply should feel more confident now even if prices have yet to reach distressed levels.
Aberdeen remains generally bullish over Asian economies because it believes that once commodity and other bottlenecks are addressed, the push for wealth in China and India and other emerging markets will drive not only their own economies but also those around them for decades to come.
Aberdeen favours Singapore and Hong Kong for the similar characteristic that they share û being home to companies with strong balance sheets and conservative, transparent managements. Aberdeen holds large positions in Singapore-listed companies; not because it is attracted to its economy, which is relatively small, but because of the regional and global reach of the companies listed there. In the case of Hong Kong, its companies have survived exceptionally difficult circumstances; they know how to manage their businesses and look after shareholders, Aberdeen says.
Aberdeen is also positive on India because it has been able to find many well-managed companies there, from information technology to pharmaceuticals. IndiaÆs chaotic democracy tends to hold the country back at times, but many companies there have learned to deal with this situation, the fund house says.
China, Korea and Taiwan are the markets where Aberdeen is underweight. Despite the large market China represents, Aberdeen prefers to gain exposure to the country through Hong Kong-listed firms that do business on the mainland. The fund house has found it hard to find well-managed companies listed in China and also has concerns that the profits of mainland-listed firms may not be as real as they are made out to be.
Korean companies appear cheap on paper but Aberdeen believes the discount is deserving because corporate governance remains a key issue for many Korean corporates, as well as for the Korean courts that rule on governance issues. In the case of Taiwan, Aberdeen has not been able to find good quality companies or companies with reasonable valuations.
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