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Asian Growth Engine
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Asian Growth Engine


Investors have heard a lot about the slowdown in developed markets, how emerging markets are looking more promising in terms of ...

... economic growth and that Asian markets have some of the best growth potential. But just how good are Asian markets looking for investors?

If the latest quarterly results out of Asia are anything to go by, then the future is looking stronger for markets there.

In the first quarter of 2012, companies like Samsung Electronics delivered 81-per-cent profit growth year on year off 22.4-per-cent revenue growth. This has been driven by strong performance in the smartphone segment where it moved to the number one position in global sales, a position Samsung already holds for other key products, TVs and memory chips. The Korean company is seeing better margins as its global presence in this high-growth and high-margin category increases.

Similarly, in the first quarter Hyundai Motor was able to deliver 59.9-per-cent profit growth off 8-per-cent revenue growth as it continues to improve product pricing, gain economies of scale and demand for its cars continues to be healthy - even in Europe where sales grew 30 per cent in the first quarter over the prior year.

Clearly there are other companies that are seeing the impact of a recession in Europe and sluggish growth in other markets, but this is still a market where leading Asian companies that are improving product quality can continue to increase global market share by offering good value-for-money products. But since the end of March we have seen earnings revisions for both Korea and Malaysia of more than 5 per cent that are keeping earnings-based valuations in these markets very attractive.

Asian markets are attractively priced following the market correction of 2011. The region is now trading at a forward price-to-earnings ratio (P/E) of 11.7 times, which is at a deep discount to the five-year average of around 13 times. Asian companies are expected to deliver double-digit earnings growth over the next two years.

Similarly on a price-to-book basis, the current valuation is 1.6 times book value (versus the five-year average of 2.1 times), and yet the return on equity (ROE) is much higher than it was five and 10 years ago. On both valuation measures we are still one standard deviation below from five and 10-year averages. Markets are continuing to price-in a lot of bad news. This is good news for investors.

Asian corporate balance sheets continue to be in very healthy shape and economic growth prospects remain sound. By focusing on a company's fundamentals, especially on those that are increasing global market share, it is possible, even in a sluggish economic environment, to find companies that can deliver high and increasing returns on equity and assets.

Four reasons to jump in

Multinational corporations are increasingly highlighting Asia as the key focus for their future investment plans. Given their potential to invest anywhere globally, they are expanding their reach and presence in the Asian markets. Clearly they believe that investing in Asia will deliver good returns in the future. Private investors can participate more directly by investing in Asia themselves, and gaining better exposure to those companies that are participating fully in the opportunities the region has to offer.

The main factors supporting the growth of Asian markets include:

 1. Growth engines

Emerging Asian economies are some of the fastest growing in the world and investing in the region's equity markets means capturing that potential. The International Monetary Fund (IMF) is forecasting real gross domestic product (GDP) growth for China and India of 8.2 per cent and 6.9 per cent, respectively, in 2012, compared with 2.1 per cent for the US and -0.3 per cent for the eurozone. The IMF is forecasting growth of 5.4 per cent in 2012 for the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam).

Asia is not as dependent exporting to the west. Domestic economies and other Asian economies have become the key drivers of GDP growth in the region. This trend will likely continue with the full implementation of an ASEAN free-trade agreement by 2015.

 2. Rising incomes

Regional governments are shifting economies away from export-led growth to domestic consumption. Rising disposable incomes in the region are driving healthy growth in consumption. According to an OECD report, Asian consumers could account for over 40 per cent of global middle-class consumption by 2020.

In terms of sectors, this should provide a boost to consumer discretionary stocks and services, such as autos, consumer electronics, healthcare and financial services.

 3. Sound finances

Asia had its financial crisis back in 1997-98 when foreign debt-to-GDP ratios rose beyond 180 per cent for the four largest ASEAN economies. Asian countries and companies learned some hard lessons in the aftermath. Indonesia had an estimated public debt to GDP ratio of 24.5 per cent in 2011 compared with 69.4 per cent for the US and 79.5 per cent for the UK. Asian economies now have large foreign exchange reserves, fiscal surpluses and positive trade balances and it is now the turn of developed economies, such as Ireland and Greece, to receive IMF bailouts. The pain of deleveraging of governments, companies and individuals is still ahead for many parts of Europe and this will have ramifications and increased risks for investors in those markets.

Asia's low debt levels combined with high savings rates make this region more resilient to external shocks than other regions in the world. According to the IMF, developing Asia is expected to have a savings rate (as a percentage of GDP) of 43.3 per cent in 2012, compared with 13.1 per cent for the US and 20.3 per cent for the eurozone.

4. Diversification

Asia offers a diverse range of economies, so it can provide an array of investment opportunities for those who don't want to put all their eggs in one basket. China and India offer up consumption and infrastructure plays, whereas Indonesia and Thailand offer commodity and financial consolidation themes.

Even after the rise during the first quarter, it is still a very enticing time to be buying Asian equities. Attractive investment opportunities continue to be available in countries as diverse as Korea, Thailand and China.


Total Returns of equity indices as at 31 March 2012





































Source: DataStream, data as at 31 March 2012.  MSCI Total Returns Indices in USD terms.

By David Urquhart
7th May 2012
Source:  Professional Planner