Companies have been buying back stock and paying out good dividends - activity that should ultimately be rewarded by higher prices. Asian countries are enjoying relatively firm economic growth compared with Japan and Europe, a favourable backdrop for corporate earnings.
One key issue is the development of benchmarks. Whether you are an active or passive investor, index changes can have a meaningful impact on portfolios. In Asia, we see a couple of issues developing this year that investors should consider. One is the upcoming adjustment to Taiwan, and the second is the deal flow we are likely to see through the year.
Taiwan will see its index weight increase again in May as the second and final part of MSCI’s Limited Investibility Factor (LIF) is dismantled. MSCI has traditionally applied a weighting discount on Taiwan to reflect the difficulties that many foreign investors have in accessing that market. But given market liberalisation over the past few years, the country has earned a full market capitalisation weight in the Asia and emerging market indices. The increase will boost Taiwan’s weight by several percentage points, rising from 11 per cent to 14 per cent in the Asia Pacific ex-Japan benchmark for example.
The prior adjustment in November 2004 did not lead to any noticeable jump in the market, but at the margin, next month’s change will force many institutional investors to carefully analyse their active position in Taiwan. The market has derated over the last several years and now trades at a pretty reasonable 12x earnings. As consumers around the world continue to buy their iPods, high definition TVs and fancy handsets, remember that many firms in the Taiwanese electronic sector are keeping busy as somewhat anonymous but still profitable suppliers to these industries.
Brad Aham, principal and head of active emerging markets equity team at State Street Global Advisors
