“If I am going to take a long-term view”, I would much prefer to invest in Asia than in Europe or the US, says David Fuller on Fullermoney.com. You can see why. Over the past few years, Asia has grown at about 7% annually, accounting for over half the world’s growth as Asian consumers have begun spending – and this story is far from over.
In China, for instance, retail sales have jumped by almost 50% over the past four years, but with more than 80% of Chinese buyers making their first car purchase, there is vast scope for further growth as the country industrialises. And Asia’s yield appeal has improved markedly of late. Firms have paid down debt and boosted profitability and cash flows, which has allowed them to grow dividends; Mike Kerley of Henderson Global Investors notes that “Asian markets now offer an income premium over those of Europe and the US”.
Meanwhile, investors don’t seem to realise that Asian markets are less risky than other emerging regions, says Joseph Little of Cazenove. Unlike eastern Europe and Latin America, major Asian countries now have current-account surpluses and, with the exception of Indonesia, are net creditors, with their foreign exchange reserves eclipsing their external debt.
Furthermore, 45% of Asian debt is in local currency, issued at a fixed yield and of more than five years’ duration. History shows that this is the safest way for emerging countries to borrow. Latin America’s debt, by contrast, is strongly weighted towards short-term, foreign-currency-denominated or variable-interest-rate borrowing. All this makes Asia far less vulnerable to a financial crisis than its emerging counterparts; indeed, “the region looks more like a developed country when we consider its financial riskiness”. Yet this is not reflected in equity prices – emerging markets remain highly correlated. Given its superior risk profile, Asia is too cheap and is “due for a rerating”; it should decouple as investors cotton on.