Although still very much tied to the fortunes of the global economy, Asian markets are increasingly dancing to their own regional tune. The attractive valuations and higher dividend yields in Asia have brought domestic and foreign liquidity into the equity markets and have certainly been a major contributor to their out-performance.
It seems like only yesterday we were all highly concerned about the global spread of SARS. As a result of the epidemic and its effect on south and east Asia in particular, the region was a major laggard in the first months of 2003. But it bounced back quickly and within the emerging markets universe, Asian countries benefited the most from the cyclical tilt of investors and upbeat sentiment on information technology. The equity markets of India, China, Thailand and Taiwan have performed particularly well. Hong Kong has also been one of the better performing markets, as a result of key concessions by the mainland authorities.
Overall growth in southeast Asia has held up better than initially feared, continuing to run at year-on-year rates of 3-5%. There is a positive consensus from fund managers about the medium term prospects. Fundamentals are sound and valuations attractive. East Asia, already the fastest growing region in the world, is set to record growth of 5.7% in 2004, fueled by a healthier global environment, improving domestic conditions, and continued strength of the Chinese economy.
The World Bank’s Vice President for East Asia and the Pacific, Jemal-ud-din Kassum, says one major change underpinning the better outlook for the region is the increasing integration, evident most obviously in booming trade with China. “It is clear that Asian firms are vigorously seeking opportunity within the region. This trend augurs well, and will reinforce the sorts of policy decisions agreed at the Bali Summit of ASEAN leaders.”
Kassum also highlights renewed activity in global technology industries, and China’s emergence as an even more important global production base for high-tech multinationals, which is energising intra-regional production networks and trade.
Kenneth Chong at Hamon says: “We are positive about the outlook for the technology sector for the next 12-18 months as new products and technological upgrades are driving up demand across the technology spectrum. Specifically, we like three investment themes in this sector. First, the handset ‘food chain’ which is witnessing strong growth driven by camera and colour handsets, second,the Optical Disk Drive sector with fresh growth opportunity is being opened up with product upgrades from CD to DVD, and lastly, the TFT LCD sector has emerged as a new driver for demand, while the supply ramp-up in new generation plants, for panel production, have been slower than anticipated.”
One important consequence of the SARS outbreak is the priority now being given to remote access solutions such as the installation of virtual private networks (VPN) and telecommuting facilities. South Asian companies in particular, have changed their IT priorities, moving their focus towards the communications segment - working from home, VPN, additional communications services and laptops. In keeping with the heightened demand for services like remote access and internet conferencing, Asian companies are allocating larger budgets for infrastructure and servers.
A survey regularly conducted by JP Morgan in association with Singapore firm East & Partners shows that nearly 44% of the 900 largest firms in Asia intend to install wireless local area networks. This includes 9% already using wireless LAN. Fifteen per cent of all participants plan to install wireless LAN in the next 12 months.
Chris Wong, manager of the ARN Newly Industrialised Economies Fund comments: “While we are unsure about the latest message from the market, one thing we are confident is that replacement demand for IT related products seems to be picking up.
On reflection, we are asking if the market should be less worried about how far Asian currencies will move up, assuming export earnings are picking up momentum, given the deep-rooted global industrial re-alignment we have seen over the course of the TMT bubble. This latter consideration has led us to deviate from the prevailing wisdom in the market. Buying sectors on the dip and keeping a bigger cash position is the end result of our analysis.”
Foreign investors remain massive net buyers of emerging Asia. US-based equity funds surveyed by AMG Data Services reported net inflows totalling $3.59bn (E3.1bn) for the week ended October 8. Inflows into Asia-Pacific ex-Japan funds were the biggest in the past 130 weeks (that is, since April 11, 2001). The biggest gainers were Korea, Taiwan and India, but the money is well spread. Investment has picked up in Thailand and to some extent in Indonesia. As long as they continue to make progress with restructuring, banking reform and corporate profitability, capital inflows will continue rising.
Kenneth Chong of Hamon Investment Group in Hong Kong believes the Asian markets may consolidate in the short term, triggered by concern on exports: “The recent G7 meeting issued a call for Asian countries, notably China, to allow their currencies to rise in order to check the widening gap in the US current account deficit. Also the unemployment issues in the US have drawn attention to competitive advantages in Asia and there may be further talk on trade protection measures. While these are not going to derail the export momentum of Asia, they may be used as an excuse for profit taking. Given the fact that they are overly owned, we believe the export -oriented stocks are likely to underperform in the near future.”
Managers’ investment focus seems to have shifted more towards sectors linked to domestic consumption and certain technology sub-sectors, where demand outlook appears to be quite promising. There is evidence that Asian domestic consumption is picking up, which will drive the next phase of economic recovery.
In Hong Kong, unemployment is stabilising and retail sales are recovering. China is assisting Hong Kong with the signing of Closer Economic Partnership Agreement and the relaxation of mainland Chinese travel. Chong comments: “Hong Kong has witnessed the most obvious improvement and this is likely to bring an early start of a cyclical recovery. However, among all the Asian countries, Korea will probably see the slowest to pick up, as the country is still recovering from the consumer credit bubble burst back in March, due to the tightening of credit card lending.
The Asian markets have performed strongly over the last two quarters and now appear ripe for some consolidation. Additionally, China has taken pro-active policy initiatives to slow down some of the over-heated sectors like auto, steel and property. This is likely to dampen market sentiment for some of the related stocks in the region.
The long term picture though is promising for investors in the Asian region. ING’s view is that these markets will see appreciably higher average earnings growth (15-20%) than the major markets will: “Taken over a series of years, these markets are cheap. They are also much cheaper than the major markets.”

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