Craig Mowll

The loss of momentum in Europe and the absence of any new potential driver to push European equity markets to new highs will see retail investors increasingly turn to Asia over the next 12 months according to Louis Vincent Gave, COO and Chief Risk officer of GaveKal Capital, on the eve of his Australian visit.

With little to keep retail investors and the marginal investment dollar in Europe, Asia looks well positioned to capitalise on Europe’s loss, particularly with the MSCI Asia index now outperforming the MSCI World for the first time since the first quarter of 2010. Adding to this woe Eurozone equities are now underperforming cash, gold, local bonds, international bonds and international equities.

Mr Gave commented, “Unfortunately for Europe, the marginal investment dollar is more often than not highly momentum-driven and chases performance. That’s because it is usually provided by the retail investor, and retail investors have a long track record of being momentum jockeys.”

This also mirrors the attitudes of investors in Australia according to GaveKal’s Australian partner, Certitude Global Investments. CEO Craig Mowll commented, “Our monthly investment Index, the CGIII, surveys the attitudes of Australian investors and our last report echoes this sentiment. In fact Asia was one of the few regions to stand its ground when investors were asked which international markets they were most keen to invest in over the next 12 months. Most other major markets saw a decline in investor appetite.”

But both GaveKal and Certitude have cautioned investors that not all boats will rise with the tide and country divergence is ever more important. There are widespread differences between the emerging markets within Asia, they agreed.

Mr Gave expanded, “Between 2003 and 2010 there was a high correlation between Asian equity markets driven by the emergence of China as an economic powerhouse, the quintupling of energy prices and the GFC and recovery, but since then the correlation has loosened tremendously. China, Hong Kong and South Korea have been underperformers as growth in China has decelerated. Meanwhile political developments in India, the Philippines and Indonesia have been drivers of the markets.”

The recent CGIII lends further support to this. Mr Mowll added, “We saw in the August CGIII that within Asia the attitudes to each country vary enormously. We saw appetite for Asia increased on the whole, however on an individual basis, interest in China was down slightly while India and Japan were on the increase. The balance of payment surplus and good inflation levels in the Philippines will also make this a stand out for investors.

“Asia is not a homogenous group and investors will increasingly look for managers that act on this and factor this into their portfolio construction.”

One of the key themes of Mr Gave’s Australian visit will be stock selection and he is expected to suggest that the days of casting a wide net are also over, with individual stock selection more important in light of the tremendous divergence within markets. Mr Gave explained, “There is a focus now to concentrate the portfolio on strong conviction ideas to add more value. If we look at Chinese internet stocks versus SOEs or Japanese banks versus exporters these are clear cases in point.

Mr Mowll concluded by saying that investors are increasingly seeking the expertise to give them the confidence to invest in Asia.

He concluded, “Australian investors are informed enough to know that Asia is not one homogenous emerging market but they may not have the time to understand the impact of demographic profiles, political and economic developments on the performance of individual markets. This is why they turn to an investment manager that is nimble enough change the portfolio quickly as the region evolves.”

Louis Vincent Gave will be visiting Australia as a guest of Certitude next week.

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Pamela Young

Australian companies need to act in the new financial year to broaden the diversity of their workforces and remove the ‘bamboo ceiling’ by including Asian Australians in senior positions, according to Pamela Young, author of Stepping Up and Managing Director at growthcurv.

Young, a global specialist in growth strategies and cultural change, says having a more diverse workforce can help Australian businesses expand into Asian markets, which represent a great opportunity for the local economy.

“Greater diversity in Australian workforces will contribute to building cross-cultural awareness, Asia capability and long-term profitable relationships with Asian nations. But as a first step, we are not adapting our business cultures or processes to keep Asians in the workforce at home.

“A bamboo ceiling exists for Asian Australians in the same way that a glass ceiling exists for women. Just as females walk away from male-oriented cultures, so do Asians walk away from work cultures that favour Caucasian people at the top,” said Young.

“A number of people know they don’t get short-listed for jobs, especially at senior levels, because their name looks too long or too difficult to say, or they don’t look the right way, so often they end up leaving their employment. They don’t have the Anglo-Saxon background which is too often a prerequisite for career advancement,” Young said.

“One in four Australians living here today was born overseas and almost another one in four has one parent born overseas. Despite this, people of Anglo-Saxon and European heritage still largely hold the majority of power and influence.”

Young is calling on corporate and political leaders to step up and remove this bamboo ceiling.

“We promote our multicultural society to the world, but when it comes to recognising and accepting leadership talent we favour those who look like us. In a globalising world, there are serious growth limitations to this.

“It is time for change now. With the new financial year having started, it’s important that companies look at the way they engage with, manage and promote their staff and remove any racial bias which stops Asian Australians and others with the right skills from rising through the ranks,” she said.

“Many businesses report that their graduate recruitment intake is 50 per cent Australians and 50 per cent from a variety of Asian nations. Yet migrants, or children of migrants, are opting-out of the corporate world at an alarming rate.”

Young said with more diverse leadership teams that included Asians, Australian businesses would develop greater competitiveness and competency when selling their goods and services to our fast growing neighbours.

“The first step to building Asia capability is to engage with the people who work for us here.  We need to learn about their cultures, listen to them, respect their views, promote those who have leadership skills to the top and allow them to help us break into Asian markets.

“Removing the bamboo ceiling will allow Asian employees to have more progressive careers and build skills in our top teams. We need this capability to expand as a nation and promote our own prosperity, productivity and growth.

“With just 23.5 million people, we are a tiny market and with growth rates hovering between 2% to 3%, we are not enjoying the good life as we did in the 1990s. However, opportunity is knocking at the door.

“Our closest neighbours in Asia represent almost half the world’s population and their economies are growing at rates between 4% to 8%.  We must increase our efforts to get a larger slice of the action. We must engage better with our Asian neighbours, including China, with almost 1.4 billion people and GDP growing at 7.6%. While it is a challenging market to enter, as it takes time to build relationships and learn its languages and culture, we must make a greater effort as the opportunities for growth are huge.

“It’s time for Australian businesses and political leaders to step up and make this happen. Let’s not live through another decade relying on our resources sector to carry the load,” said Young.

“There are just a few hurdles we have to get over and they are mostly attitudinal. We need to want to do business with Asian people. We have to be open to learning their culture and language. In addition, we have to acknowledge that ‘our way is not the only way’. When you take your services and solutions to another market, one that is so culturally different, you need to be able to adapt.

“The first step is easy: better integrate Asian people living in Australia and ensure there are no barriers to their succession to the top of your organisation. If you act now, the benefits will come,” Young said.

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Bank Indonesia’s policy U-turn is among a series of decisions Asian officials have taken recently to insulate the world’s fastest-growing region from slower global growth and any European upheavals.

The good news for investors is that Asian authorities have scope to buttress their thriving economies against global troubles. Public debt is relatively low and interest rates are at levels that allow them to be cut to good effect.

Policymakers in China, Korea, Malaysia, the Philippines and Singapore are among those who are bracing their economies because evidence is mounting that strife in the developed world is hampering the region’s growth. Of special note was a report that showed China’s exports fell 2.1% in September from the previous month, to herald the second consecutive monthly drop in China’s trade surplus.

This helped to crimp China’s economic growth to 9.1% in the year to September, the slowest pace in two years. In October, a key manufacturing index for China dropped to its lowest level in three years. Korea’s export growth also cooled in September and October, while the country’s industrial production fell 1.9% in August after shrinking 0.3% in July. Singapore’s exports unexpectedly dropped in September and the island’s GDP only grew at an annual rate of 1.3% in the September quarter. Taiwan’s economy shrank 0.3% in the September quarter, its first contraction since 2009.

The drop in global demand is prompting countries such as Malaysia, the Philippines and Singapore to lower growth forecasts for 2011 and 2012. The International Monetary Fund (IMF) has trimmed its growth prediction for Asia to 6.3% for 2011 and 6.7% for 2012 – still healthy rates, it must be said. “While domestic demand remains strong, Asia has clearly not ‘decoupled’ from advanced economies,” the IMF said.

The list of steps that Asian countries have taken of late to shield themselves from a troubled global economy includes the Philippines introducing Asia’s first fiscal-stimulus package for 2011. After exports dropped for a fourth straight month in August, Manila on October 12 announced a package of public works and anti-poverty measures worth 72 billion pesos (A$1.7 billion), while cutting its 2011 growth forecast by 0.5% to 5%.

A day later, Beijing announced tax breaks and easier access to bank loans for small businesses, as Europe’s woes added to the urgency of countering the effects of China’s recent tightening of monetary policy on small manufacturers. Amid concerns about how China’s bad-debt-laden financial system would cope with a renewed global crisis, Central Huijin Investment, which is part of the country’s sovereign wealth fund, revealed it is buying stakes in the country’s four big banks. China’s Prime Minister Wen Jiabao said on October 25 that Beijing will make adjustments at a “suitable time and by an appropriate degree” to keep China’s economy moving.

Malaysia’s government on October 7 announced that in its fiscal 2012 budget it will hand cash to the poor, raise wages for public servants and boost spending on transport, to help higher private investment and consumption make up for sluggish global growth. Kuala Lumpur reduced its forecast for 2011 growth by 0.75% to 5%.

Well-placed Asia
Also in October, Singapore’s central bank said it will slow its currency’s climb to help its economy withstand a drop in exports. “Given the stresses and fragility in the advanced economies, the prospects for growth in Singapore’s major trading partners have deteriorated,” the central bank said, announcing the decision. The Monetary Authority of Singapore, which uses movements in the Singapore dollar to fight inflation, said it will still let the currency appreciate because inflation above 5.5% exceeds its target.

So far, Indonesia and Pakistan are the only countries in east or south Asia to have cut benchmark rates this year (as the Reserve Bank of Australia did on November 1). Bank Indonesia, explaining why it lopped its reference rate by 25 basis points to 6.5% last month, flagged further rates cuts and other measures “to mitigate the impacts of declining global economic and financial performance on Indonesia”. 

Other central banks have ruled out any more of the rate increases that have featured across Asia since the start of 2010 as part of a drive to quell inflation.

While the Bank of Thailand in October refrained from raising rates for the first time this year because the country is grappling with the worst floods in more than 50 years, the Bank of Korea’s policy-setting committee was explicit about how the uncertainty from Europe is prompting it to keep rates on hold.

“The committee judges that downside risks to growth have expanded – due mostly to the likelihood of the sovereign debt problems in Europe spreading,” the committee said in a statement on October 13, after deciding to keep rates steady for a fourth consecutive month. The Bank of Korea has increased rates five times in 2010 and 2011 to get inflation, which is above 5%, under its 4% ceiling. (The Bank of Thailand has raised rates nine times since July 2010.)

Authorities in countries such as China, Hong Kong, India, Korea and Singapore are constrained by inflation from undertaking bolder monetary and fiscal steps to protect their economies. (The Reserve Bank of India, in fact, on October 24 raised rates for the 13th time in 19 months to control inflation that is running close to 10%.) But most have enough scope to make a difference thanks to how policymakers have normalised monetary and fiscal policies since stimulating their economies three years ago.

As occurred in Australia, once the crisis of 2008 to 2009 eased, central banks boosted interest rates to more normal levels in nominal terms. So they can cut again, if the situation warrants.

While fiscal deficits are still above pre-crisis levels in many countries, pacy economic growth has improved government finances and officials have capacity to spend if needed. The G20 economies had a public-debt-to-GDP ratio of more than 100% in 2010, a figure that is projected to reach 125% by 2015. Public debt levels in Asia ex-Japan, by contrast, are only around one-third of GDP and are projected to decline to less than one-fifth by 2015.  

As well, banks, companies and consumers are in good shape debt-wise across the region. Asia ex-Japan companies, for instance, are holding about US$1 trillion in cash and are confident enough about their outlooks to be boosting cash-payout ratios (thus increasing dividend returns).
So Asia’s politicians and central banks shouldn’t have to make too many unexpected steps to shield their economies as much as possible from global woes.

This document is issued by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237865 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS is available at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is Perpetual Trust Services Limited (“Perpetual”) ABN 48 000 142 049. Perpetual is not the publisher of this document and takes no responsibility for its content. Reference to ($) are in Australian dollars unless stated otherwise. 2011 FIL Investment Management (Australia) Limited.   Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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Some of Europe and America’s most prestigious companies are shunning the well-established financial centres of London and New York and looking to Asia as a place to list and sell their shares, as well as their handbags.

Italian fashion house Prada has applied to list on the Hong Kong stock exchange in the next few weeks. US leather goods maker Coach may also list shares there, while luggage firm Samsonite and Italian motorcycle maker Ducati are also reported to be planning Hong Kong share listings.

They follow the footsteps of French skin care firm L’Occitane, which raised about A$700 million selling shares to investors in an initial public offering (IPO) in Hong Kong late last year, becoming the first French company to be listed in Hong Kong.

These foreign companies listing in the region are doing so because they expect a substantial part of their sales to come from the region. Selling shares in Hong Kong acts as a great marketing tool, as well as an effective way to raise funds for expansion.

Greater China now makes up around 15% of global luxury sales. With increasing incomes this figure is expected to grow to 44% by 2020. Over the next decade, China itself is expected to become the world’s single largest market for luxury goods, worth A$100 billion, up from $12 billion in 2010, according to a recent report by Asia-focused research firm CLSA. One reason is that luxury handbags, clothing, watches and jewellery are a favoured way for Chinese to display their increasing wealth – wealth that has risen due to their fast growing economy.

Prada already generates more than a third of its sales in Asia and has 14 stores in nine Chinese cities and a further eight outlets in Hong Kong; while Coach has 58 stores in China, Hong Kong and Macau.

Such high profile listings have transformed Hong Kong into the world’s biggest IPO market. It has been the world’s biggest market for IPOs for the past two years, eclipsing other major financial centres that have suffered in the aftermath of the global financial crisis.

Hong Kong has long been the place to list for Chinese firms seeking to raise funds from overseas, but it is only recently that companies from elsewhere have come to those with the money.
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While the number of IPOs in Asia is strong, the number of them has dropped off slightly from the record amount raised late last year. This is because Asian investors are quick learners and realise that not every stock continues to rise after its listing. Investors are, rightly so, becoming more selective.
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Higher wage growth over recent years, coupled with Asian governments increasing the social safety net, has resulted in the rise of the Asian investor. More investors are looking towards capital markets to park their money. For China in particular, we expect to see further developments in RMB-denominated IPOs.

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Fidelity International’s analysts, who are at the heart of Fidelity’s investment process, actively meet with and review over 90% of the world’s largest listed companies on behalf of our over five million customers across Europe and Asia Pacific.

Our proprietary ‘bottom-up’ research is central to Fidelity’s investment process. Developing this research relies heavily on the quality and caliber of our analysts. They must have strong and independent thought, show a commitment to unearthing new and exciting investment opportunities, and work as a team with our global portfolio managers to buy and sell stocks at the right time, at the right value.

Every day a Fidelity analyst is meeting with a company, talking to its senior management or being briefed by its many stakeholders. They therefore develop an in-depth knowledge and thorough understanding of a company, its competitors, management, suppliers and clients.

These analysts are in a unique position to gain insights and thoughts from some of the world’s leading companies about their ideas for the future, their insights into current trends, and their plans in terms of capital expenditure, expansion, mergers and acquisitions.

To gain a better understanding of these themes and take a closer look at the more interesting issues facing some of Asia Pacific’s listed companies during 2011, we asked our fixed income and equities analysts to respond to a survey in December of last year.

The survey asked over 60 Asia Pacific Fidelity analysts to outline general themes, issues and opportunities they were hearing or witnessing from the companies they cover during Jan – Dec 2010.

This report is a snapshot of this knowledge across the Asia Pacific region which we hope you will find interesting and helpful as you make your own investment decisions.

3.0 About Fidelity

A global leader in investment management

Fidelity International is a global leader in investment management. Established in 1969, Fidelity has a presence in 23 countries and territories around the world and employs 4,676 people. Investment management is Fidelity’s primary business, managing US$231.6 billion in assets for millions of customers – major institutions through to individuals – spread over more than 750 equity, fixed income, property and asset allocation funds. Fidelity’s research spans the world – over 350 investment professionals within Fidelity International plus over 650 from associated companies contribute to and share the investment insights used by our portfolio managers.

Fidelity’s research and analysts

Fidelity adopts a research-driven, bottom-up approach to portfolio construction. As active managers, we believe that markets are only semi-efficient, meaning that markets, sectors and stocks can be overvalued or undervalued at any point in time and that research can uncover profitable opportunities.

Fund portfolios are built from the bottom up, security by security, taking account of general market trends but not being driven by them. Portfolio managers are responsible for their funds and encouraged to develop their individual flair, while benefiting from global research contributed to and shared investment professionals within Fidelity International and associated companies.

Analysts contribute to global research, undertaking extensive inquiries at all levels of a company to understand how it is positioned to deliver results for investors. Whether equities, fixed income or property-related funds, it is only through this first-hand contact with companies – rather than relying purely on a non-affiliated firm’s research – that they can fully evaluate an investment’s true potential and consistently add value for investors.

Fidelity analysts and portfolio managers across the globe access senior company management, their offices, their plants and factory floors. They talk to company’s suppliers, distributors and customers to build a three-dimensional view of every company in which they invest.

4.0 Key findings

Asian consumer bolsters another solid year of growth ahead

Revenue and operating profits

Over 77% of analysts said the companies they met with during 2010 are likely to see improved sales flows of 10% or more in 2011.

50% of analysts said they expect operating profits to grow in excess of 10% in 2011. This expectation is typical for Asia Pacific companies and in line with previous years, confirming that 2011 will be yet another year of solid growth levels for companies across the region.

Measurements used

• Profitability continues to be the most common measurement and key driver of success by management in Asia Pacific companies (64%) followed by share price performance (16%) and sales (10%).

Time horizons

• With respect to time horizons, most companies (66%) in the region are focused on delivering 2-3 year strategies, adopting a medium to long term view overall which is again, a common benchmark in Asia Pacific organisations.

The Japanese profit imperative

That profitability is a key determinant of a company’s value should come as no surprise, particularly in a weakening global economic outlook. The Japanese market, however, takes this metric to the extreme: 90% of respondents indicated it was the primary measure of success. The structurally lower margins in Japan (which relates to such issues as too much competition, lack of a competitive takeover culture, unwillingness to allow clearing through bankruptcy, etc) may indeed be the reason for management to have a more intense focus on it. The issues are however, structural so any focus on profit may not necessarily result in any rapid improvement in the situation.

The Asian consumer

The top theme fuelling this profit and sales growth that analysts indicated is linked to Asian consumption growth. In contrast with the west, retail and consumption in Asia have shown remarkable resilience, even through the crisis. Asian retail sales volumes increased by 4.8% in 2009 and 5.7% in 2010, according to the Economist Intelligence Unit, with annual growth accelerating to above 6% to generate a remarkable US$8.7trn in sales by 2014. China – the one market in Asia where private consumption is importantly growing faster even then GDP overall – in particular is being seen as a regional growth engine, and this was a key theme that underscored our analysts’ observations.

In particular, China’s consumption story loomed large as a theme for our analysts. Yet, China is by no means the only component of the Asian consumption story. Outside of China, emerging Asia not only has strong domestic demand – but also a demographic dividend to go with it. India has a rapidly expanding middle class, and an overall labour force expanding by a world-beating 2m a year. Growth in Indonesia’s domestic consumption market, which now makes up 60% of its economy, recently climbed to a 18-month high of 5.2%.

Moreover, this consumption story is no longer limited to a single market sector or product category theme. Our analysts saw growth in numerous areas, such as autos, infrastructure, healthcare, luxury products.

All cashed up (and looking to spend?)

Balance sheet strength

63% of our analysts feel the balance sheets of the companies they cover are strong, very strong or extremely strong. Whilst none of these descriptions necessarily implies “too strong”, clearly companies in Asia are now carrying too much cash on their balance sheets. This is a natural reaction to coming through a deep recession and credit crunch. In Asia, the lessons were learnt in 1997, and companies have run strong balance sheets ever since. This stood them in good stead in the 2008 credit crunch. History would indicate that as confidence returns, companies will no longer see the need to hoard so much cash, as it lowers return on equity. But are we seeing evidence of this yet, and how will they deploy the cash?

Around a third of our analysts (29%) detected a change in attitude and approach to managing this cash surplus. This was the case for Japan as well, where several of our analysts sense that companies have moved on from taking a defensive stance of hoarding cash. Given the bloated nature of balance sheets, some may view this result as a disappointingly low number. However, it seems that some companies may require more time to feel confident enough in the global recovery to deploy their cash piles. Those who do however, plan to deploy the surplus, intend to spend it during 2011 in three key areas: dividend payouts, capital expenditure and acquisitions. In Japan, the primary focus is likely to be dividend payouts (42%) compared to Asia with a primary focus on capital expenditure and acquisitions (both ranking at 30% each).

Higher dividend yields and share buy backs are both positive to the Asian market growth story. If you have underlying revenue growth of 10%, there is likely to be some operational gearing, and earnings growth should be significantly higher. In addition, you can add the dividend yield to calculate total shareholder return. If this holds true, equity shareholders in Asian companies can look forward to good capital growth coupled with increasing income; a double-benefit to returns.

Capital expenditure and expansion

Most analysts believe the companies they cover are looking to expand their operations in 2011 more rapidly by opening new facilities in locations throughout Asia but outside of Japan (36%), or opening new facilities in existing locations (21%).

Interestingly, more Japanese companies have indicated their intention to expand in Asia ex-Japan compared to Asian companies (54% vs 21%).

The majority of companies that are looking to expand in 2011 do not intend to increase their capital expenditure as an overall percentage of their revenues (73%) and will use their expected dollar increase in overall revenues to build up their business; reinvesting in the Asian growth story and driving organic growth. So companies are looking to expand but the rate of expansion is not expected to increase. Instead, it will grow in line with sales, and thus perhaps in line with free cash flow growth. As a result, this may not equate to any serious reduction in cash piles as capex will be offset by incoming operational cashflows.

The US recovery matters

Recognising that domestic profit growth in the region is also reliant on non-Asia Pacific-related economic conditions, many analysts indicated that the US economy in 2011 will be a key factor that they and the companies they cover will be watching. The impacts of a further decline or even signs of further recovery were noted as a key factors that could impact the growth momentum of Asia Pacific companies.

However, the developed world and the exports demanded by the US, are still a very important engine of growth for many Asian companies. If global demand diminishes, those companies in Asia that are focused on exports will suffer and as a result, analysts continue to believe that the outlook for the US and European economies remains an important factor.

According to the World Bank’s latest “Global Economic Prospects”, domestic demand in emerging economies accounted for over half of global growth in 2010. The developed world grew at 2.8% whilst the emerging world grew at 7%. However, the developed world and the exports demanded by the US, is sill a very important engine of growth for many Asian companies. If global demand diminishes, those companies in Asia focused on exports will suffer and as a result, analysts continue to believe that the outlook for the US and European economies remains an important factor.

In addition, the concentration on expanding production or sales capacity in China and other Asian markets, provokes the question “can the Asian growth accommodate all this expansion?” The US recovery is needed to help absorb some of this new capacity and sustain the growth momentum.

Some of our analysts also focus on the rise of intra-Asian trade and how this will impact Asian companies. It’s important to note however, that intra-Asian trade often involves the shipping of components (from Japan to China for example) for final assembly and ultimately destination to the US and Europe. The iphone is a good example – designed in California, it is assembled in China by a Taiwanese company using components made in Japan (Japanese components account for about a third of the iphone’s material costs). So, domestic demand in Asia and developed market demand in US and Europe are both key drivers of future success.

Global leadership vs global mindset

Very few of the companies analysts met in the region during 2010 are already global leaders and very few, in the eyes of our analysts, have the potential to become global leaders in the next five years.

The vast majority of companies do, however, have a global strategy as well as management teams who actively consider both global opportunities in addition to domestic ones.

Certainly, a number of firms from Asia have become household names globally, largely through scaling up domestic market competencies into international positions through market share acquisition: hence India’s world-beating business process outsourcing sector, or Korea’s digital device giants, or Australia’s leaders in the ‘rocks and crops’ space.

The traditional sense of going global, i.e. providing globally competitive products and services to win market share away from home, may be changing. For Asian companies busy capturing growth opportunities in their home ground, venturing into global markets and investing into developing globally attractive products may not be a high priority. This becomes a slightly different story for Japan, where globalisation is a requirement to grow for some companies.

Japan and China still on track

Whilst local and global consensus tends to assume that Japan’s maturing economy will cripple Japanese enterprises ability to head global competition, our Tokyo analysts point out that Japan will continue to generate global leaders. Half of our Tokyo analysts say that their sectors already have some or many global leaders, and 42% say some companies in their respective sectors have the potential to become global leaders in the next five years.

Most of these sectors already have proven global leaders today (such as electronics, auto & auto parts, machinery, trading companies) but few new faces have the potential to make it to the global league tables such as the internet or entertainment sectors.

Outside Japan, we tend to think of Samsung, LG and Hyundai and think the list stops there. But actually there are more Asian leaders than we think, typically in non-branded areas such as the Indian generic pharmaceutical companies or for example, the Chinese dominance in rare earths.

Corporate governance

Half the analysts surveyed said it will take 10 years or longer for the companies they meet within Asia today to adopt global standards with only 2 1% of companies operating at this level today.

A different perspective in Japan

It bears noting that Japanese responses are more enthusiastic about the opportunities that these technology trends offer. Today Japan already is a global leader in manufacturing display screens, ICs and chipsets which are critical inputs into the supply chain, and our Tokyo analysts highlight additional interesting growth opportunities, such as tablet computing, mobile gaming and payment platforms, and display technologies. The Japanese government’s huge commitments (through subsidies and incentives) to push its companies into global leadership positions in green technologies likely make climate change a more tangible and exciting opportunity there than in the region as a whole.

Key challenges and issues

When asked to identify the leading challenge facing companies in 2011, the three most popular themes our analysts raised were as follows:

• 25% Regulation: government policies, tax, government spending and political uncertainties
• 20% Inflation: Inflation causing rising costs, rising interest rates, fiscal tightening
• 10% Competition: price competition, pricing pressure, foreign competitors, domestic consumption
• 29% of our analysts are concerned about governments tightening their grip in areas such as preventing oligopolistic markets, enforcing product liability, controlling labour standards etc; reflecting governments’ keenness to keep an eye on consumer protection as private consumption becomes a key growth engine for the region.

Whilst regulation and competition are perennial factors that concern companies and analysts, inflation is the biggest new concern. Expressing itself through higher wage costs and higher raw material costs, it is likely to be a big headwind for many companies this year

The consumer, whilst more confident than in 2009, may not be robust enough to absorb a pass-through of higher costs.

6.0 The final word

Matthew Sutherland, Head of Research, Asia Pacific, Fidelity International

“If there was nothing left to worry about, markets would be at a peak. But there is plenty left to worry about – persistently high unemployment in the US, fiscal belt-tightening in the UK, the seismic cracks appearing in the fabric of the Eurozone and its currency, monetary tightening to arrest inflation in China. I expect the bull market to go on ‘climbing the wall of worry’ this year.

Companies are indicating significant levels of revenue growth this year. This is good news, and should provide the bedrock for another strong year of market performance. The potential fly in the ointment here is likely to be inflation. It is expressing itself via higher wages and higher raw material costs, and could result in margin expectations being reduced as the year goes on. This would not be atypical – it’s the reason “sell in May and go away” works as a market adage.

Aside from revenue growth, additional benefits will come from an increased willingness of companies to do something constructive with the overly-large cash piles they built up as a reaction to the problems of 2008/9. Interestingly, whilst they will spend on capex, capex will not grow as a percentage of sales. More importantly, they are likely to give more back to shareholders via increased dividends and buybacks. We should thus have a year with good earnings growth coupled with higher yields and buy-backs, which makes for much higher total shareholder returns.

It’s interesting that analysts are still focused on the US economy. They are right to do so. Whilst domestic demand in emerging market accounted for half the world’s growth last year, according to the World Bank, the other half of the world’s growth came from other areas, and the US economy is still the world’s largest. So at the margin, its success or failure to recover can make a big difference to companies’ ability to grow, especially in the export areas of the economy.

The analysts did not really mention this, but the longer term worries in my view include social unrest and political instability resulting from higher food costs, water shortages, and the growing disparity between rich and poor.”

Hiroki Sampei, Director of Research, Japan, Fidelity International

“The results tell us that companies across Asia Pacific continue to expect a strong Asian consumption demand, as the middle class grows and urbanisation progresses. Another interesting point is that many of our Asia ex Japan analysts are more concerned about a supply shortage in workforce, energy, infrastructure etc to back up this growth, rather than an over supply of production capacity.

With so much expectation on the Asian Consumer engine, we need to be levelheaded about how far earnings growth can be sustained by this single engine. This is why the US recovery does matter for the Asia Pacific companies to continue their path of healthy growth. On the contrary, when the US recovery happens, this may potentially fuel inflation which many of our analysts have flagged as a potential bottleneck for growth.

The daily company visits and research activities conducted by our analysts, aggregate into a vast database of information that help us develop our own understanding of what is happening from a macro perspective. Another advantage for us, is that our approach allows us to take in what is happening even before the macro statistics are released. From here we identify the risks and opportunities that may impact the companies we research and apply this insight back into our stock picking.”

Sabita Prakash, Head of Fixed Income, Asia Pacific

“Asia’s credit universe largely spans corporates in the more basic infrastructure services, including property, commodities, TMT, energy and utilities, reflective of the emerging nature of the underlying economies. Quite naturally, the prospects for companies in these sectors are biased towards growth given the emerging markets they support, largely China, India and Indonesia. Nonetheless, the relatively stable nature of infrastructure demand leads our fixed analysts to expect that top and bottomlines may be stable rather than grow substantially, which is ideal from a credit investor’s perspective.

While our fixed income analysts do expect strong bottom-lines, they are somewhat wary of chunky capex and M&A plans that are generally supported by cash flows, but often substantially through external (debt) financing. That said, analysts are sanguine about credit quality given Asian companies’ strong liquidity profiles built up over the past few years. Furthermore, company managements appear to be cautiously optimistic following lessons learned from the crisis. In terms of expansion, analysts felt there was a greater focus on gaining regional scale and market share rather than expanding globally. The two notes of caution the analysts repeatedly mentioned were regulatory risks that could put the brakes on planned expansion and corporate governance standards, which have been improving, but are still considered to be low compared to other developed markets.”

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