Asia, historically an export story, is believed to be particularly vulnerable.
Bears also argue that higher interest rates in the US and China could cause bubbles in the recovering Asian real estate market to pop and destroy Asian consumer confidence. They also say the Chinese economy is out of control and a hard landing is inevitable.
However, there is plenty of evidence to contradict the pessimists and suggest that Asia could be one of the best performing stock markets this year. First, Asian equities remain cheap relative to global equities, particularly those in developed markets. Asian earnings growth assumptions look too bearish relative to global equities. Even in the absence of strong earnings growth, there is potential for investment returns to improve further over the longer term as Asian companies begin to pay attention to corporate governance.
Second, the bears ignore the resilience of current Asian growth. Though Asia was expected to flounder as expansion in developed economies slowed in 2004, Asian GDP growth accelerated to close the year at 7.3 per cent, compared with 6.4 per cent for 2003. Third and fourth quarter growth for 2004 was higher than 7.3 per cent. Exports did decelerate but domestic consumption and investment took over as key growth drivers, and this trend can be expected to continue in 2005.
Third, the economics of the region are in excellent shape. There is no pressure for central banks to hike interest rates drastically because inflation is low and appears well controlled. Current accounts are in surplus, putting pressure on exchange rates to appreciate. Company balance sheets are generally in excellent shape, with lower gearing than firms in the developed world, higher free cash flow generation and superior dividend payout ratios.
Fourth, the Chinese authorities have confounded the hard-landing camp: growth remains firmly on track. Further monetary tightening this year is expected to be moderate because headline inflation has begun to decline and domestic money supply is below the central bank’s target. Reform in the banking system continues, and the listing of two state-owned banks this year should improve disclosure and corporate governance and facilitate the write-off of bad debts.
Greg Kuhnert, portfolio manager, Asian equities, Investec Asset Management
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Asia Pacific: Evidence points to good performance
March 2005
Asian analysts are suffering from optimism fatigue in 2005. After being almost excessively bullish on the region’s prospects in 2004 – when corporate earnings were forecast to expand by 45 per cent – they expect growth of just 5.6 per cent this year. The main reason for their caution: concern that slower global growth and higher US interest rates will put pressure on indebted US consumers, thus far the main driver of the US economy. Related articles: |
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