Fund Managers Make the Case for Asia

Asia's sound corporate fundamentals, attractive valuations, and hints of resilient regional growth keep fund managers optimistic

By Rita Raagas De Ramos

Fund managers with Asian portfolios are counting on the resilience of the economies and companies in this part of the globe to produce decent returns at the minimum while the US and Europe bear the brunt of the global financial crisis.

After all, companies are already presumed to have benefited from the Asian financial crisis of 1997 by paying closer attention to balance sheet positions, cash flows, and risk management—all of which have allowed them to manage the current crisis relatively well.

"The region has undergone considerable change following the 1997 financial crisis and now has a healthy balance sheet with room to manoeuvre," says Khiem Do, the Hong Kong-based chair of Baring Asset Management's Asia multi-asset team.

Asia has turned a significant corner and is now well positioned to lead the global economy out of the current crisis, adds Do.

"The case for Asia looks compelling across all asset classes, some of which are even trading below cost production, he says. "Asian market valuations are at an 18-year low, caused by the forced selling over the past few months, as a result of deleveraging and de-risking by offshore investors. As far as we are concerned, there is a strong buy signal being hoisted."

Do is particularly bullish over Hong Kong and China. Barings expects China and India to account for 50% of GDP growth in 2009 and emerging markets to make up the remaining 50%. The developed world, including the US, is unlikely to contribute to growth in 2009.

The fund house predicts that exports will be affected by reduced demand from the West. It expects economic growth in China to remain robust, however, supported by government spending and domestic demand.

The announcement last year of a $586 billion stimulus package—to be spent on housing, infrastructure and post-earthquake reconstructing—shows just how serious the Chinese government is about addressing the decline in economic growth and exports, Barings notes.

The role of the consumer is crucial to China's continue economic growth. Barings notes. Due to a combination of credit tightening over the last five years and a fiscal policy that continues to allow for room for expansion, Chinese GDP has held at between 8% and 12% and is expected to continue to do so.

Urbanisation has also been a key driver of growth in China. It is anticipated that the total urban population in China will almost double, rising from 532 million in 2008 to 970 million in 2020. With this comes demand for infrastructure, utilities and food, all of which play a major role in driving growth for the economy. In terms of demand for food, as a percentage of every new earned dollar, India will spend 70% on food, China 40%, with the US only spending 20%.

"Since inflation has now fallen sharply from its peak in February 2008, the Chinese government has considerable flexibility to use both monetary and fiscal measures to stimulate the economy," Do says. "We expect the government to continue to reduce taxation and boost spending on infrastructure and consumption."

Halbis Capital Management, the active fundamental investment specialist of HSBC Global Asset Management, believes that the key is focusing on quality stocks at the right price.

The crisis has reinforced some of Halbis's central views about investing: managing risk is as important as managing returns because wealth-destroying market events happen much more often than people realise; investors should be true to their time horizon; and investors must understand the characteristics of individual stocks assessed in the context of valuations, rather than looking just at country and sector allocations.

"Our outlook for 2009 is shaped by the characteristics that will help lead to outperformance over the appropriate time horizon and at the right price," says Ayaz Ebrahim, Hong Kong-based CEO for Asia-Pacific at Halbis. "We continue to favour quality companies with strong balance sheets, resilient earnings and stable cash flows. These are the companies better placed to cope with the downturn and tight access to credit, while continuing to invest in their businesses."