Battling Asian flu
Asian markets proved remarkably resilient last year, despite the problems in Western markets, ending 2007 up by around 30 pct. But in January, as a US recession loomed and panic spread, mass sell-offs saw the MSCI EM Asia fall just over 14 pct, as foreign investors sprinted for the exits.
“The fear is that if there is a recession in the US and Europe, Asian growth will be in trouble,” says Khiem Do, head of Asian multi-asset at Baring Asset Management, speaking at the time of the sell-offs. “This correction isn’t pleasant but this is the impact of the concern over the US recession. It is a nasty bug that is going around.” However, some markets, such as the China A-share market, Malaysia and Singapore, held up better than others through the turbulence.
Mike Hanbury-Williams, F&C’s head of Pacific equities, points out that although Asian stocks can experience volatility of 20 pct in one day, there is no real volume in these prices. “It’s often relatively small volumes that are sending prices downwards. When we buy in we see the stocks bounce back.”
Indeed, Asian markets have subsequently attempted to rally. “This suggests they may be able to withstand the cold winds of a US recession, if it is not too severe,” says Do. “Asian exports will fall but that won’t be disastrous as Asian exports to the US have fallen quite dramatically over the last 10 years, and intra-regional Asian trade has increased.”
Despite the argument that there will be few upside surprises to China this year, and the fear that it is getting a little toppy, Do said that it remained a good growth story and the valuations amongst the Hong Kong-listed China stocks were still cheaper than those in India. “But India is building a lot of infrastructure to modernise its industries and cities, and the growing middle classes are upgrading their homes. In China we can see the government trying to push the growth westwards, as Shanghai, Beijing and Guangdong are all in the east, and that requires a lot of spending on infrastructure.”
James Weir, investment analyst for the Atlantis Asian Recovery Fund, is more cautious, predicting a short-term pull back in India, in a longer bull market. “Things have gone quite far, quite fast in India, but it benefits from the requirement for infrastructure, which is gigantic. There are also a lot of power company IPOs coming up in the first quarter, and there will be a tremendous demand to build plants and for coal to fire these stations.”
He also thinks that China looks overbought in the short term: “It has had a tremendous run, and a correction is now underway. The fundamental story remains but the government has to balance out the flows, whilst inflation is still very strong, and interest rates need to increase. So it’s all about how well can they manage inflation in a market economy. If they manage it badly there’s an event risk to the equity market.”
Indeed, in India attempts have been made to clamp down on some of the hot money coming in, but China and Hong Kong have seen a massive run up in their markets driven by domestic retail investors. “The government is trying to manage the process of getting that liquidity from the A shares market into Hong Kong and other markets in Asia, but there’s a phenomenal amount of money in China waiting to come out,” says Weir.
The problem is that with currency controls in place, Chinese investors can’t just buy Hong Kong ‘H’ shares if they want them. A lot of the flows have been into mutual funds, but there are quotas on the amount of money that can come out of China, and the markets that it can go into. “No one wants an absolute tsunami of cash coming out of these markets in an uncontrolled fashion, but domestic Chinese investors will have an enormous impact on the Asian equity markets over the coming years,” Weir adds.
If you want to read more on which markets are expected to do well in Asia this year, please visit:
http://www.thomsonimnews.com/story.asp?sectioncode=&storycode=35200
