After the wobble - stock-picking opportunities in South East Asia


Equity markets in Asia excluding Japan were quick to shake off a bout of volatility in late February and early March and subsequently posted steady gains up to the end of last month. The dynamism of the region’s markets, particularly those in South East Asia, has attracted high levels of foreign investment. Perhaps the greatest potential, however, comes from the possibility of the vast pools of Chinese savings beginning to be invested in the region.

The Chinese stockmarket was blamed by many for triggering the global correction but in truth concerns about the US economy played a crucial part and Chinese equity markets soon recovered to make new highs.

The case for investing in Asia excluding Japan still stands. The fast-growing emerging markets, such as China and the Philippines, offer exciting investment opportunities while the more established markets, such as Hong Kong and Singapore, are enjoying the benefits of solid global and Asian growth combined with a benign US monetary policy and strong liquidity.

From a macroeconomic viewpoint, South East Asian markets, which tend to benefit from abundant global liquidity, look better placed than their counterparts in North East Asia, where growth is more closely tied to US consumer trends.

China and Hong Kong remain particularly attractive. Chinese economic growth continues annually at about 10% and this provides a supportive backdrop for individual companies. The property market in China and Hong Kong, in common with much of the rest of South East Asia, appears reasonable value compared to growth in wages, while the long-term liberalisation trend provides numerous investment opportunities. Meanwhile, the arrival of consumer banking, a return to modest inflation, rising wages and the wealth effect of rising property and share prices create a potent mixture. 

The Chinese government’s capital spending on infrastructure is also expected to rise significantly over the coming years. Roads, railways and subway networks will benefit from spending growth. Beneficiaries of these trends are likely to include Road King Infrastructure, which invests in toll roads, bridges and now developing property, PYI Corporation, an investment holding company that specialises in ports infrastructure, and Beijing Capital International Airport.

Rexcapital invests in China’s fast-growing lottery and scratch card industry. With its strong management team, Rexcapital has recently been working towards expanding its operations in what appears to be a market with significant potential.

Shenzhen Investment, formerly a sleepy conglomerate, is a company that has not only benefited from being in the right place at the right time, namely the property sector in China, but has also restructured to focus better and create shareholder value.

Heng Tai specialises in importing and distributing consumable goods, household items and fresh fruit and vegetables. As demand increases in China for high-quality consumables, Heng Tai is able to provide a distribution network for foreign producers seeking to access this potentially vast marketplace. The company also stands to benefit from any upward revaluation of the renminbi.

In addition to Hong Kong and China, other South East Asian growth markets have included Vietnam and, more recently, the Philippines. Vietnam has delivered impressive growth in recent years, with the S&P/IFC Vietnam Total Return Index up 143% in US dollar terms during the year to the end of March. The country’s high growth levels, however, have attracted foreign buyers, leading to somewhat overstretched equity valuations in recent months. While economic trends remain supportive, March seemed a sensible time for investors to lock in profits.

The Philippines has been another attractive market. Economic stability and fiscal reforms have made the market increasingly attractive to foreign investors. Financial stocks, such as Banco de Oro and SM Investments, performed well over the first quarter of 2007, providing the finance for, and participating in, the country’s growth.

Having recovered from the recent market wobble with relative ease, equities in Asia excluding Japan appear to have positive prospects. Asia has lower corporate debt levels relative to the rest of the world and has benefited from structural improvements in corporate profitability. While valuations are not as cheap as a few years ago, this is also the case elsewhere in the world and in Asia the price rises appear well supported. Any concerns are, therefore, likely to centre on general problems affecting the global economy. Meanwhile, abundant global liquidity persists, which Asia, through its trade accounts and foreign exchange rate policies, is inextricably linked with. While there is growing evidence to suggest the US will undergo a mild slowdown, domestic orientated, quality stocks in Hong Kong, China and South East Asia have the potential to maximise returns for investors. The mouth-watering potential is even there of a full-blown bubble emanating from China, as the country’s liquidity ‘stockpile’ and appreciating currency lead asset prices higher, in many ways reminiscent of Japan in the 1980s.

Ian Beattie, head of Asian equities, New Star Asset Management

Past performance is not necessarily a guide to future performance. The opinions expressed here represent the views of the fund manager at the time of preparation and should not be interpreted as investment advice.