What’s next for Asian Equities?


Having bounced back strongly since the lows of 2008, Asian equity markets have recently been through a soft patch, underperforming developed markets such as the US and broader global indices. What’s next for Asia share markets?

The recent softness in Asian equity markets stemmed mainly from worries about the impact of rising inflation and the monetary tightening needed to counter it.

“However, such concerns appear to be overdone,” says David Urquhart, Portfolio Manager of the Fidelity Asia Fund.

“The recent softness should not obscure the strong long-term case for Asian equities, which remain supported by favourable demographics, strong economic growth, the rising global prominence of China and good macro-fundamentals.”

Investment flows into Asia ex-Japan equities were negative in the first quarter of 2011, with investors tending to favour other markets, notably the US. However, a number of factors suggest that investor retreat due to rising inflation in the region may be overdone.

Mr Urquhart says “inflation in Asia reflects strong economic growth in the region and this is supportive of corporate earnings and thus sharemarket prices.

“It’s not a given that policy tightening always leads to market underperformance. For example, between 2003 and 2008 China raised interest rates with no major adverse effects on its growth.

“While strong demand is a contributory factor, the bigger driver of inflation in recent times has been higher commodity prices, including food prices. The generally accepted view is that these types of price rises tend to be temporary. In recent weeks we have seen a significant pullback in many commodity prices which, if sustained, should help to cool inflation.”
Mr Urquhart added “moreover across all of the region’s main countries the longer-term trend is towards higher earnings, greater urbanisation and a rapidly expanding middle class. Importantly, these increasingly wealthy population segments also tend to be relatively young and highly aspirational, resulting in both a growing ability and willingness to consume more goods and services. This obviously points to a huge business growth opportunity for companies.
“China perhaps represents the most striking regional example of a country which is on the verge of entering a golden age of consumption. To date, the country has been most well known for its manufacturing and exporting prowess and much less for its consumption capabilities. This is unsurprising perhaps when the country’s share of private consumption in GDP is only around 36%, roughly half the level in the US. According to some observers, China today resembles Japan in 1969 and South Korea in 1988: on the cusp of a more mature phase of economic development, where consumption intensity picks up significantly.
“Another important consequence of China’s burgeoning domestic demand is that it’s grown to become a key source of export growth for the region’s other economies, reducing their traditional reliance on western demand. This is strongly evidenced by the rising share of China in the export profiles of many countries. For example, China (including Hong Kong) accounted for 41.4% of Taiwanese exports in 2010, up significantly from 24.4% in 2000.”
Mr Urquhart pointed out, that while much of the world grapples with austerity measures aimed at reducing public debt burdens, most Asian economies are relatively unencumbered by such constraints. Budget deficits may have risen in many cases but, unlike in less fortunate regions, it will be fast economic growth rather than painful spending cuts that will do most of the work to redress the balance of Asian economies.
“So while inflation worries and associated monetary tightening have been grabbing the attention of investors of late, helping to explain the recent run of comparatively weaker performance for Asian equities, closer inspection suggests that investor concerns in this area could well be overdone. The willingness of the region’s central banks to tighten policy can itself be seen as a good indicator of confidence in the strength of their economies. The near-term outlook for regional economic growth remains very good and this will be supportive of corporate earnings growth.”

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