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Asia has plenty of growth and exciting prospects, but price/earnings, price/book value, and earnings growth valuations all show that the risks are to the downside, Rosgen says.
ôOur problem is the price of entry to the Asian party,ö he says. ôEven after recent corrections, Asian share prices still capture too much good news and disregard the myriad risks in terms of growth, policy-making or market specifics.ö
High multiples in overbought markets, based on excessively optimistic expectations, are neither healthy nor sustainable, Rosgen says. Using P/BV and return on equity, and compared with both emerging and developed markets, Asia is some 20% above the fair-value line. P/BV ought to be 2.2 times but instead is 2.7 times, he notes.
ôThe key is that a 20-25% correction takes the Asian index back to the uptrend that started in 2003. The bull would not be slain, just brought under control. What we are seeing is a typical cycle. Nothing more, nothing less,ö Rosgen says.
Among markets, China A and B shares, India and Singapore are most vulnerable, Rosgen says. Among sectors, these would be industrials and real estate.
On the flipside, he says Hong Kong, Korea, Malaysia and Taiwan offer best risk-reward. Support comes from low expectations, strong domestic fund flows and reasonable valuations.
ôKorea and Taiwan are the markets currently least liked by consensus, which history suggests is a powerful argument in their favour. For Malaysia, commodities and liquidity are positive angles,ö he says.
The best opportunities rest among large caps, companies with strong cash flows, and companies that offer good value over those that are gaining from momentum investing, Rosgen notes.
Rosgen warns investors against taking the consensus view in the markets wholesale.
One such consensus that has been forming is that Asian economies will decouple from the global growth cycles, to which Rosgen takes the contrarian view.
ôOver the next 20-plus years, Asia increasingly will become a domestic market with a small percentage of exports, just like Europe and the US. But that is not going to happen in 2008 or 2009,ö he says.
Decoupling can be looked at in four ways û trade linkages, profit cycles, consumption, and stock markets, Rosgen says, arguing that the evidence for decoupling in each case is weak. Direct and intraregional exports are now more tied to US and G3 non-oil import growth than in the 1980s or 1990s. Profit cycles between Asia and the US and Europe have become more synchronized due to outsourcing and equity market constituents. Asian consumption is growing more rapidly than in the G3. Stock market correlations are the highest in 30 years.
ôThe decoupling argument has its apostles and disciples, and has probably
been reflected in asset allocation to Asia,ö Rosgen says. ôWhen it becomes clear in 2008 that Asia remains part of the global world, disappointment will loom large.ö
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