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Asia: Long-term prospects enticing
By Fiona Hamilton
The Chinese Year of the Pig has brought a nasty dose of reality for those who had more than doubled their money in Chinese shares in the preceding twelve months. The Pig represents fertility and virility, but on February 27 the Shanghai stockmarket proved decidedly lacking in the latter, toppling 9% from its peak in a single day.
China is an important engine of growth, not just in Asia but also globally. It buys masses of raw materials from developing countries and sophisticated machinery from Germany and Japan, and its low manufacturing costs have helped to keep a lid on inflation in the West. So the turmoil revived memories of the late nineties collapse in Asian stockmarkets - from which they took years to recover.
Most experts say it's different this time. Leading regional managers such as Aberdeen Asset Management had been warning for some time that Chinese listed companies were hugely overpriced. However, Chinese companies listed in Hong Kong, for instance, were much less stretched.
Nor does the Chinese economy appear to have suffered a body blow. Outside China, many Asian companies are much more soundly based than they were 10 years ago, and while there are still plenty of risks in the region there is also lots of excitement.
Growth prospects
First State's Angus Tulloch is one of the most widely followed Asian fund managers. While he never makes any secret about the short-term dangers of investing in Asia, he remains full of long-term enthusiasm.
"It is one of the most rapidly developing and industrially diverse areas in the world and has some of the world's most exciting investment opportunities,' he says." Growth prospects look exceptional compared to Europe".
Tulloch notes that wage costs in Asia have been rising, but whereas this may be a risk to inflation in the West it could benefit companies selling to Asian customers, so that is where he has been putting the emphasis in his First State Asia Pacific Leaders fund. Examples include Advance Info Services, a market leader in the Thai mobile phones sector, and Genting, which is Asia's largest casino operator.
The Martin Currie Asia Pacific fund has also done well in recent years, and its manager, Jason McCay, remains similarly positive. "There is no change in our bullish outlook for Asian markets. The fundamental story remains strong, and we continue to be able to identify attractive investments". McCay uses a Dynamic Stock Matrix to reduce his choice of companies to manageable numbers then conducts intensive research, helped by a nine strong team in Shanghai. He looks for quality, value, growth and change and has been more enthusiastic than most of his rivals about Australia - which accounts for around a fifth of the fund.
The future in Asia
The Henderson Asia Pacific fund has been less impressive, but could pick up strength as Andy Beal gets into his stride. Beal had a great reputation before joining Henderson in late 2005, and has settled in well as one of several managers in Henderson's London office supported by a recently enlarged team in Singapore. "Being based away from your market helps you to keep your perspective, but you need the detail and granularity of having people on the ground, and visiting the region regularly". He says his positive view of Asia is very simplistic.
"Charts show that the Chinese economy will be 30% larger than the US economy by 2050, and India will be the third largest economy in the world. So for long-term capital appreciation, how can you invest anywhere other than Asia".
He thinks China's decision to join the World Trade Organisation in 2000 proved that it is committed to reform, unlike Russia, where the political and economic outlook remains unclear. "The Chinese are clever and applied, and seem determined to sort out the problems in their economy". As a house, Henderson believes the market setback should be seen as 'an overdue breather, which could last a while,' but is unlikely to be the start of a major bear market.
The Invesco Perpetual Asia Pacific fund also had a tricky year in 2006, but had done well before that and manager Stuart Parks has a good reputation. He had only 6% in Chinese shares before the shake out, and had warned that the Shanghai market looked extravagantly valued, with many companies available much cheaper Hong through the Kong stock exchange.
Illustrating the huge choice of investments available in Asia, Parks has been cautious about Korean and Taiwanese companies, many of which are technology oriented, but he is much more enthusiastic about Southeast Asia, where he has honed in on local demand in sectors such as infrastructure, property, banking and consumer services. "We believe domestic demand is becoming a sustainable and important growth-driver for the region's economies," he says.
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