The global slump in equity markets, which continues to cheapen regional stocks, has provided investors with an attractive case to buy equities in two of the region’s most contentious markets, China and India, according to Andrew Pease, Russell Investment’s Chief Investment Strategist Asia-Pacific and author of the latest Asia Market Commentary.
According to the report, sliding stock prices and ongoing concern about a prolonged global economic rout has increased the attractiveness of mainland China and India as preferred markets. “China is the standout market in the region on valuation grounds but has also been one of the worst performers. China is starting to attract the attention of value oriented fund managers and is a defensive market heading into a global slowdown.”
Despite its poor performance, Russell finds India to be the most compelling market for investors considering Asia. “The relatively attractive valuation from our Composite Value Indicator (CVI) combined with the easing of inflation pressures, peaking in the tightening cycle and India’s defensive characteristics heading into a global slowdown put this market at the top of our list”, said Pease.
Pease says that the economic issues facing Asia ex-Japan seem “decidedly old fashioned” compared to the US and Europe. Asia’s problems include overheating, inflation and policy tightening while problems impacting the rest of the world may see less need for policy tightening across the region.
Singapore, Taiwan and Hong Kong are in neutral valuation zones and are export exposed economies heading into a global slowdown. Singapore is likely to be slower to respond to global growth downturn and Hong Kong also remains vulnerable. Taiwan’s technology bias links it closely to the global demand cycle, but also could be one of the main beneficiaries if the current pessimism is misplaced and demand recovers through early 2012.
“Share market valuation for Asia ex-Japan has become more attractive as a result of the market shake-out we are experiencing, but it still lags the rest of the world. The upside of the global turmoil is that policy tightening to deal with inflation pressures is now less urgent. The downside that weaker global demand will add to the export slowdown is already underway,” said Pease. “We’re cautious near-term on global markets while volatility remains high and US growth indicators are weak. Conditions for Asian markets should improve heading into 2012 if, as we expect, the US economy begins to recover to a trend-like pace.”
Thailand is the region’s least attractive market, according to the report. It is the most expensive market in the region, according to Russell’s CVI, with inflation trending higher over the last year and reaching 4.1% in July.
“There are also concerns that the new government’s promises on wages and investment will add to inflationary pressures. A combination of rising inflation, monetary tightening, slower global demand and relatively expensive share market valuation keeps us cautious on Thailand,” said Pease.
Other key points from the report include:
- Russell says fears of a renewed recession in the US are overdone and expects a rebound in US GDP growth to a 3% pace through the first half of 2012
- Korea looks attractive on valuation grounds as it has been hit hardest by market volatility, losing nearly 12.8% in August alone
- Malaysia looks expensive, according to the composite valuation indicator. It has one of the highest export to GDP ratios in the region (97%) and is vulnerable to a global downturn in export demand
- Europe remains an ongoing cause of concern for global markets. Another sell-off would signal that markets are losing confidence in Europe’s ability to solve its fiscal problems and be a pre-cursor to a larger crisis.