With the US economic outlook darkening rapidly, and exports to America a key component of Asian growth, it’s no wonder the consensus on Asia ex-Japan equities is “uncertain, bordering on bearish”, as Investec’s
Greg Kuhnert puts it. Garry Evans of HSBC notes that 2006 earnings growth estimates for Asia ex-Japan have been revised down to 8% over the past few months and maintains his “cautious” stance, while Dimitri Chatzoudis of ABN Amro told Bloomberg that until investors are convinced the US will experience a soft landing, they are hardly likely to pile into Asian stocks. But while near-term setbacks do seem likely, given Wall Street’s vulnerability, investors should keep in mind Asia’s long-term attractions for when the dust settles.
As Kuhnert points out, a series of positive structural changes have been “sweeping Asian economies” over the past few years. Corporate and political governance has improved, Asian firms are developing their own brands rather than just manufacturing foreign ones, and the Asian consumer has developed “an ever-increasing shopping habit”: Hong Kong-based China Mobile, for instance, is gaining two million to three million users a month. Asian firms’ return on equity, a key gauge of profitability, is at a record high and could rise even further as balance sheets are flush with cash; there is scope for “further belt-tightening without feeling real pain”. What’s more, Asian p/es are so low that “they can only be compared” to the era of the Asian crisis.
Martin Spring’s On Target newsletter (reproduced here: Why Asian equities are about to take off) points to Asia’s entrepreneurial mindset, growing presence in high-tech sectors and the mounting importance of intra-regional trade as further grounds for optimism. Spring identifies the Aberdeen New Dawn investment trust as a “really good emerging Asia fund”, while there is also a London-listed ETF, the MSCI AC Far East ex-Japan fund (IFFF).