Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The stockmarkets of the Asia ex-Japan region have been volatile as investors have sought a meaningful steer. Initially, they viewed Asia as a safe haven relative to the US and Europe and moved heavily into the region, buying large companies in Hong Kong, China and India. Valuations soared, with China gaining more than 19% in September 2007 and India up 17% in October. As the extent of the credit crisis revealed itself, however, sentiment shifted and concerns that a US economic growth slowdown would become a recession dragged the rest of the world down. Those markets and stocks that had risen the furthest in 2007 typically gave back the most in early 2008, with falls of 22% in China and 14% in India in January.
Grounds for optimism
The dust has far from settled and the questions remain whether there is more pain to come in the west and, if so, whether the Asian markets have the potential to decouple. High global liquidity levels give grounds for optimism. There is plenty of monetary liquidity around û far more than required to support industrial output growth. Investors, however, need confidence to use such liquidity and are seeking reassurance of a return to health within banks and the wider financial sector.
The current accounts of Asian countries are also supportive. The US current account is deep in negative territory while the surpluses within Asia have steadily grown. At the end of 2007, China's foreign exchange reserves exceeded $1.5 trillion, equal to more than $1,000 per head of the population. Sovereign wealth funds from Asia have stamped their mark on global markets, with the kitty of China Investment Corporation alone expected to swell up to $300 billion. This wall of money has solid foundations and, as well as being used for acquisitions in the west, can offer support for markets within Asia.
At a corporate level there have also been changes for the better. Valuations have been pushed higher but remain reasonable, balanced by rising profitability. Inefficiencies are beginning to be worked out of the system, with overseas investors helping to push corporate governance up the boardroom agenda. Companies are further supported by low levels of debt within their balance sheets. Western banks have achieved strong profits in recent years through financial derivatives and by stoking consumer booms with generous offers of debt. This derivatives and consumer loans binge has, however, now been followed by a hangover. By contrast, the Asian financial sector has relatively little gearing. Being low in the credit cycle, Asian banks have clear opportunities, which should help maintain momentum as western institutions falter.
Opportunities around the region
The property sector across South East Asia offers opportunities, with house prices attractive relative to wages. Urbanisation continues apace, with demand increasing for retail and commercial property. In addition, the US dollar-linked currency regimes of many economies in the region mean that interest rate cuts by the US Federal Reserve, as seen in recent months, are imported. In already buoyant economies, the looser monetary policy adds further support to property. In Hong Kong, for example, negative real interest rates are making it possible to borrow at lower rates than inflation û an environment conducive to investing in property. A healthy real estate market generally supports the wider economy, particularly the financial, retail and consumer discretionary sectors.
At a country level, Taiwan appears attractive. Here, potential support is provided by the political gains of the Kuomintang, which may open doors for business, trade and tourism between the Chinese renminbi and Taiwan. Valuations are relatively low and the stockmarket is less vulnerable to profit-taking than its neighbours.
South Korea could also benefit from an easing of political headwinds, with the new political administration settling into office in late February. Lower taxes have been pledged and measures proposed to speed up deregulation to encourage an increase in investment. While demand from the US and Europe is likely to wane, South Korea registered an unexpected acceleration in export growth in February. This was largely thanks to mobile phone and ship sales to China and the Middle East.
In India, although macroeconomic prospects remain healthy, the steep rise in valuations in 2007 leaves the stockmarket vulnerable to profit taking. Recent monetary policy has been successful and the industrial sector in particular has the potential for growth.
It will be some time before the full extent of pressures on the global economy become clear. In the event of a severe US recession and a European slowdown, Asia ex-Japan will suffer. Growth levels in China, for example, are forecast to slip from double digits to 9% if there is a mild US recession but this could be lower if the rest of the world endures a more serious recession. While globalisation trends may outweigh the decoupling argument, however, the outlook for Asia ex-Japan appears favourable relative to the rest of the world. There are clearly risks but high levels of liquidity and low levels of debt make for a reasonably attractive risk/reward balance. Indeed, the fundamental growth drivers for the region remain largely unaffected despite the stockmarket falls of early 2008. Stockmarkets are pricing in much bad news but this presents buying opportunities in certain higher-quality companies.
Ian Beattie is the London-based head of Asia ex-Japan equities at New Star International and manager of the New Star Asian Opportunities Fund.
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