Asia Predicted to Lead Global Economy's Rebound

Ray Prasad, a senior fund manager at Batterymarch Financial Management, says Asia still has higher growth characteristics than developed markets

By Rita Raagas De Ramos

This is part of a mid-year AsianInvestor series on the investment outlook of fund managers with Asian equity portfolios.

Ray Prasad is a Boston-based senior global emerging markets portfolio manager at Batterymarch Financial Management. He joined Batterymarch in 1997 to perform emerging markets research and was promoted to portfolio manager in 2000. In 2005 he was named senior portfolio manager, with primary responsibility for Asian markets.

Prasad focuses primarily on the Asian markets within Batterymarch's emerging markets team, which manages around $3.4 billion in emerging market equities, including $2.1 billion in Asia.

What are the biggest opportunities that you see in the markets you are responsible for in the coming 12 months? How are you preparing to take advantage of those opportunities?

Prasad: Asia, and emerging markets in general, still have higher growth characteristics and greater profitability than developed markets. Two-year expected earnings growth is currently 11.8% for China and 10.2% for India. The figures are even higher for Taiwan and South Korea, at 19.5% and 21.5%, respectively. Compare this to the MSCI World Standard Index, with expected earnings growth of only 7.5% for the next two years.

In addition, Asian debt-to-equity ratios have been relatively low ever since the crises of the late-1990s and early part of this decade, when many of these countries began deleveraging their balance sheets. Profitability, represented by return on equity (ROE) is also more attractive for Asia than the developed world. Thanks to their sound balance sheets, the ROE for Asian companies has held up reasonably well despite their low leverage, and profitability has remained somewhat stable. Companies in the developed markets have seen profitability plummet as they have been forced to deleverage.

In our view, the most effective way to capitalise on opportunities in Asia or any market, for that matter, is to look at underlying company fundamentals, which we believe are the drivers of long-term returns. That's always been the focus of Batterymarch's bottom-up investment discipline.

How different or similar is your 12-month investment outlook now compared to the start of this year?

Our outlook for Asian markets is still very positive, based on their fundamentals. After a weak January—in line with the historical pattern for emerging markets—Asia has been on the upswing, with any remaining downgrades in analysts' estimates already priced in.

We also continue to see strength at the macro level. Asian governments have the financial wherewithal to implement economic stimulus measures to offset the global slowdown, and they have done so. China, with interest-rate cuts and enormous infrastructure spending, is the most obvious example, but countries like India have also put forth stimulus programs.

Emerging markets, led in large part by Asia, are expected to lead the global comeback. These markets don't have to go through the deleveraging process the way the developed countries continue to do, and they can move ahead without having to rebuild their financial systems.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?

We're positioned somewhat less defensively than in the first quarter—we are no longer overweight in the telecommunications and food, beverage and tobacco industry groups, whose rankings have deteriorated in our quantitative, fundamentals-based model. We also increased our allocation to the more cyclical industries such as diversified financials and semiconductors as well as consumer discretionary-related groups like autos. The cyclical names have tended to do well in recent months.

What are the greatest lessons you have learned from the global financial crisis and how will this affect the way you manage your portfolios?

I think the greatest lesson has been a renewed appreciation for risk—in terms of both scope and time. The extent of the global crisis caused stocks to behave differently than their fundamentals warranted.

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