Although they are not immune from the ongoing global turbulence, long term opportunities remain in China and the wider ASEAN region, according to Baring Asset Management.
In a recent conference held at Barings’ offices in London, Khiem Do, head of Asian multi asset, said that despite the continued global volatility he believes Asian markets are attractively priced and have the potential to bring positive returns for investors willing to take a long-term view.
“Looking broadly, the region’s balance sheet is healthy with low levels of external debt, corporate debt levels at close to 25-year lows, and a non-leveraged banking sheet,” says Do. “While valuations are not yet at bargain levels and may fall further given the deepening European financial crisis, the earnings per share (EPS) of domestic Chinese companies are at a record high and the market is deemed cheap given the long-term investment potential on offer.
“China is still showing solid GDP growth, albeit at a lower rate than the past two decades, decreasing from nine to 11 per cent to seven to nine per cent per annum. Part of the reason for this is that China’s infrastructure boom is now slowing as major projects are completed. As the country becomes more developed, there are likely to be fewer projects in the future. The government has sought to boost the economy by moving to a more activist stance, cutting interest rates and directing banks to boost lending; however, we are unlikely to see the type of stimulus package that we saw in 2008/2009, chiefly because the conditions are not as critical. Market valuations remain at the lower end of historical ranges and are starting to price in the external uncertainties and weaker than expected Chinese GDP growth.”
In the longer term in China, Barings sees potential for strong growth in two sectors: the financial services industry and the housing market.
“Currently, the Chinese banking system is strongly protected and underutilised. As the government relaxes controls and allows a greater degree of leveraging, we are likely to see significant growth, both within banking and associated industries such as law, accountancy and other professional services,” says Do. “As regards housing, property prices have risen faster than wages in the past 10 years or so. As a result, the government has tightened the criteria on home ownership in an attempt to bring prices down. The strategy is working, although housing has yet to reach ‘cheap’ levels from the authorities’ point of view. Once prices do reach affordable levels and the government relaxes its policies we are likely to see strong growth in the housing and related sectors.”
Barings also remains positive on the outlook for the ASEAN region, which has shown itself to be less vulnerable to the global slowdown when compared to, for example, South Korea and Taiwan.
“We expect China to remain Asia’s powerhouse as the economy broadens and we see the services and demands of an increasing middle class develop in line with the authorities’ long-term objectives,” says Do. “Though growth will be at a lower but more realistic rate, we see potential within the Asian economies, with their relatively strong balance sheets and low levels of debt, to benefit from this environment. As long as the average Asian company can manage its cost base and profit margin successfully, Asian equity markets should be able to benefit from stronger sustainable growth. Over the longer-term we are also expecting potential re-ratings which will secure added potential returns.”
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