Global Economics

Fund Managers Make the Case for Asia


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

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."

In addition to a bottom-up approach, Halbis believes assessing the macroeconomic environment and understanding its impact on companies are also crucial to investing.

Halbis expects volatility to persist over the first half of 2009. While Asia's growth will probably continue to slow well into the year, it is supported by stronger economic fundamentals, lower levels of leverage and healthier current account balances than other regions. However, Asia is not immune to movements in global markets, particularly during periods of high volatility.

Halbis expects China to continue to apply its considerable spending power and policy flexibility to stimulate domestic consumption and investment. This should have a positive ripple effect across the region. Fixed asset investment triggered by the stimulus programme should offset slowing manufacturing growth and sluggish property sales.

China's GDP growth for 2009 will likely come in at around 8%, according to Halbis's projections.

Elsewhere in Asia, Halbis sees attractive valuations in India despite its expectation of a slowdown of that economy to 7% over the next couple of years. Halbis believes easing inflation, an expected positive outcome in the upcoming general elections, and monetary and fiscal policy measures on the domestic front should help India's market to recover.

Hong Kong remains vulnerable to deteriorating global growth due to the large contribution from exports and financial services to its economy, but valuations for certain sectors are at a record low and that should limit the downside to share prices, Halbis notes. With corporate profitability under pressure, quality stocks in sectors such as consumer staples and utilities would likely be the better bets in Hong Kong.

Countries and territories with a strong reliance on export-driven sectors, such as Taiwan and Korea, will find the downturn more difficult to cope with. On the bright side, these markets have been sold heavily and pockets of value are emerging, Halbis notes.

Markets in Thailand and Malaysia are still overshadowed by political issues, but are also less exposed to the global cycle, which could help them in the current environment.

The continued slowdown in the global economy and the subsequent policy reactions will likely remain the dominant theme in Asia, according to Western Asset Management, the fixed income manager wholly owned by Legg Mason.

Indeed, growth in China will be an important factor for regional economic performance in 2009 given the mainland's role as an export market for many Asian countries.

However, Western Asset notes that although the infrastructure components in the recently announced policy actions by the Chinese government are expected to benefit other Asian countries, Asian economies will still see significantly slower growth in 2009 as regional exports to the US, Europe and Japan slow dramatically. Tighter global credit markets are expected to continue to impact funding opportunities for those companies that rely on the international capital markets. This, De Mello says, underscored the merits of investing in Asian bonds.

"Asia is in a much healthier financial position now than it was during the 1997-98 crisis and at current levels, all sectors of Asian local bonds look attractive," says Rajeev De Mello, Singapore-based head of Asian investment at Western Asset.

De Mello is bullish over Asian local bonds for several reasons: government bonds have rallied but monetary policy will likely remain loose and inflation should be dampened by lower commodity prices and weaker growth; sovereign and corporate bonds have been affected by capital repatriation and forced selling and will likely benefit as positions are reallocated between investors; default rates in Asia remain low whereas the current prices of Asian corporate bonds imply an unprecedented surge of failures over the next few years; and cash-rich Asian corporate issuers have begun to buy back some of their outstanding bonds at extremely cheap levels.

In terms of Asian currencies, Western Asset's outlook for the short-term is more mixed as certain countries will likely allow their currencies to fall, in order to soften the adverse impact on their export markets. However, it remains positive on Asian currencies in the medium term as the region is likely to rotate its growth away from the export sector towards domestic sectors.

"Despite the recent stabilisation, Asian corporate bonds still offer significant opportunities in a range of sub-sectors and countries and some of the highest liquidity premiums, with the best macroeconomic fundamentals," De Mello says. "In terms of risk-aversion, I believe that we have already seen the worst of that."


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