Sector focus: Asia

While Asian stocks have enjoyed a good run, the reality is that the continued flow of upbeat company news is offsetting share price appreciation as earnings continue to strengthen. Liz Evans, the manager of the newly launched Asia Pacific fund at Cavendish Asset Management, says on current valuations the market is still attractive despite the strong rally witnessed.

“The global crisis has made the recovery story more resurgent as Asia has emerged in much better shape than the West,” Evans says.

Just days after Cavendish Asset Management announced its fund launch, Veritas Asset Management revealed it will launch a China fund in October. Ezra Sun, the manager, describes China to be “one of the most exciting markets for the next decade”.

In terms of investment opportunities, China and India have shown the best performance, says Alistair Thompson, the deputy head of Asia at First State Investments.

China has benefited from economic recovery driven by government-directed bank lending, while India investors responded positively to better than expected performance by the Congress Party in elections.

“While some commentators are calling for a correction in China, and it has had an incredibly strong run in the last few months, the nature of that correction is likely to make China remain attractive,” she says. “In reality, a lot of money is waiting on the sidelines to buy into the region on a dip, which has meant that all corrections to date have been small, and often stock or sector specific.”

Evans says it would take considerable, unexpected news flow to redress that view in the wider market. “China is simply too compelling a growth story on 8% GDP set against feeble or negative growth in many other markets,” she says.

Of the smaller markets in Asia, Thompson says, Indonesia and Thailand outperformed earlier this year as they rallied strongly on the return of risk appetite in the second half of the period.

Evans adds that China and a string of South East Asian countries, including Singapore, Thailand and Indonesia, look particularly attractive.

She says Singapore’s government has done an impressive job in terms of its stimulus package. Thailand looks attractive purely on a valuation basis, having undergone a substantial period of underperformance.

South Korea, Thompson says, was a significant laggard as the market was negatively influenced by a nuclear explosion and missile tests by North Korea, and lower demand for their technology.

Thompson finds investment opportunities in financials, including banks, property and conglomerates. Apart from financials, the energy sector has also done well because of a strong oil price.

“We remain cautiously positioned as we feel the required deleveraging of governments and consumers in the West will lead to more subdued demand in the future than we have enjoyed in the past,” he says. High levels of quantitative easing make him worried about inflation.

More than half of Thompson’s portfolio is invested in consumer-related companies which he expects to be relatively immune from problems in the West. These companies, as well as his holdings in gold, have outperformed as the markets fell in 2008 and many investors rushed into gold.

However, from March, markets rallied strongly as investors took the view that the global economy was close to a bottom. Gold stocks lagged significantly as companies which had underperformed, such as banks and commodity stocks, rose sharply.

Yet Thompson expects markets to discount a rapid return to the favourable conditions of strong global economic growth that was prevalent before the recent financial crisis. “However, they are not anticipating the possibility of a substantial pick-up in inflation as a result of quantitative easing by central banks,” he says. Thompson expects these stocks to outperform in an environment of higher inflation.

Sun will adopt a strong thematic approach focusing on the social, political, economic, cultural and technological factors. Veritas expects these factors to be the main drivers behind growth in the region.

Chinese infrastructure and consumer goods look especially interesting, says Evans. “Infrastructure is definitely ripe for the stock-picker,” she says.

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