Asia to the rescue?
ASIA FOCUS
Asia to the rescue?
Huge strides in transparency by region’s markets over the past decade give some fund managers cause for optimism, reports Umesh Pandey
As global markets head for a turmoil, there are those who profess that Asia will be the key driver of future growth for the world, although there maybe some hiccups along the way. The robust economic growth that the region is witnessing is the main evidence to support their view.
Emerging markets, once shunned as the cause of the contagion that created the 1997 economic crisis, are once again becoming hot spots for funds that are looking to seek shelter from the rout that has begun in the United States and other economies that may follow.
“As we make our rounds to see investors in the post-summer season, it’s a good time to reiterate what we see as the absolute top priority, highest-conviction calls for the broad emerging universe over the next 12 months,” wrote Jonathan Anderson, an economist at UBS Securities, in a note to clients earlier this week.
He cited two reasons: a decline in the headline inflation amid falling oil prices and a possible pickup in the property sector in China.
He is not alone in professing the glory of Asia. Fund managers across the world point to the region’s dramatic increase in transparency and strengthening of balance sheets - clear signs that the lessons of 1997 have been learned and applied.
But as Asia and the emerging markets pick up the pieces and may take centre stage in a possible turnaround in the global economy, some fund manager have their doubts, saying it may be a long wait before the entire issue is resolved.
“Yes, Asia is the market to invest in and we are actively investing in these markets, but the point here is where do we find the bottom?” said a fund manager from Singapore who declined to be named.
He said that stocks in Asia, for which his multi-billion dollar fund has been hunting, have been cheap in valuation terms for the past month and they continue to get cheaper by the day.
Most analysts believe stock valuations in the region are compelling, but with volumes drying up to levels not seen in a decade, fears are spreading that the equities may become a sellers’ market that could push the prices to new lows.
Fund managers and analysts say that given the changing landscape of the global financial market, the opportunity to bottom-fish is more apparent in Asia but timing is an issue.
One of the biggest concern is political instability. Fund managers point out that Malaysia, Thailand, India, and Indonesia are all undergoing political change in some form or other that is taking away the attractiveness of the region.
Asia had been reeling from negative factors such as soaring oil prices and inflation, but as those threats ease, political instability could still negate a lot of the potential gains that could have accrued.
In any case, with oil prices now well below $100 a barrel, some analysts are recommending a stronger focus on Asia.
Mr Anderson of UBS says that the sudden, dramatic rise in consumer prices was easily the biggest macro shock to hit emerging markets so far this year. It raised fears that governments would face a stark choice between shutting down growth or risking an inflationary blowout at home. Many external-deficit countries have been particularly affected, with central banks forced to tighten more aggressively and concerns about the impact of commodity prices on the current account pushing currencies around as well.
With the emerging world already under a cloud from the combination of a global equity market decline and a real G3 downturn, this has been a distinctly unwelcome trend.
He said the final “brick in the wall” was the Chinese property market slump. Housing and commercial construction is the biggest single driver of fixed-asset investment in the largest emerging economy of them all, and it’s hard to overstate its importance to overall mainland growth or global commodity markets.
Based on his talks with clients over the past month, he said the downturn had clearly become a very major concern - and a growing number feel that China is now in the midst of what will prove to be a lengthy and painful US-style housing recession.
“The bad news, as we see it, is that neither of these trends is going to turn around tomorrow,” he said. “Headline inflation is still on the rise in most economies, and the mainland construction numbers will almost certainly continue to fall for the next few months. Therefore there is no respite for the markets thus far.
“But the good news is that the end is already in sight. By the end of the year we expect both trends to stabilise - and recover visibly through 2009, with inflation rates falling and Chinese property activity returning to more vigorous levels. And this, in our view, will be the biggest support for a restoration of confidence in the health of emerging markets going into the new year.”
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