Valuation fears on Asian stocks

Investors’ hopes for Asian domestic consumption received a blow last week as managers said companies in the sector look overvalued.

Susie Rippingall
Susie Rippingall

Susie Rippingall, the manager of the Scottish Oriental Smaller Companies invest-ment trust, which is advised by First State Investments, says many firms look expensive on a price/earnings or price/book basis.

James Chong, the manager of the Martin Currie China fund, says domestic-themed Chinese small and medium-sized companies in particular look overvalued and for this reason has sold out.

The news may spark concerns among investors in emerging markets and Asia, where domestic consumption has become a major theme.

Investors have backed Asian consumer companies in particular to benefit from a rebalancing away from exports to the ailing developed world and towards domestic consumption. (article continues below)

The firms will also benefit from increased investment in faster-growing emerging re­gions and from growing demand for emerging market currencies, it has been argued.

The demand has led emerging market currencies to strengthen, boosting consumers’ spending power. However, many emerging Asian consumers are forced to save rather than spend much of their earnings because of the continuing lack of a social safety net.

Recent data suggests that investments in Asian consumer stocks – often smaller firms – are outpacing their ­ability to increase their earnings.

“Normally, Asian markets trade at a discount to the world but now they are at a premium,” Rippingall says. “Normally, smaller caps are trading at a discount to large caps but this gap has almost closed.”

Even China, typically an investors’ darling, has come under fire. Hugh Young, the managing director for Asia and the head of equities at Aberdeen Aberdeen Asset Management, says “there are a lot of things to worry about” in China.

Young is mainly concerned about inflation and rising interest rates, but he also worries about expensive consumption plays.

“Consumer stocks in the region are also too pricey. A lot of investors were jumping on the bandwagon,” he adds.

Despite high valuations for Chinese smaller companies ­compared with large caps, however, Chong still sees value in mid-cap stocks. His favoured areas include alternative energy, e-commerce and online social networking.