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July 6, 2009 • 9:25 am 0

Beware of rising Asian stock markets

Investors who were bold enough to stay invested in Asian equities from the latter part of last year onwards are reaping the rewards of their bravado. The closely watched MSCI Asia ex-Japan Index was, after all, up 41% in the three-month period ending May 15. The sharp gains in Asian shares have, not surprisingly, triggered a bandwagon effect of investors trying to get in on the action and hoping that they’re not too late to cash in later on.

The notion that Asian companies have strong balance sheets is great, if you’re a bondholder.

For investors who are looking for a quick buck, Asian equities — or equities in any market for that matter — isn’t the place to find it. Short-term, Asian stock markets remain volatile and the fact that they have risen by so much in such a short span of time make it even more dangerous ground. If anything, the markets look poised for a correction. It may come later rather than sooner, because the momentum chasers are keeping markets afloat for now, but it will come.

“The global economy has not yet recovered to a healthy state,” says Nick Scott, Hong Kong-based CIO for Asian equities at BlackRock. “The rally in March and April is based upon investor relief that things may not be as bad as was predicted, rather than concrete evidence that the worst is over and a recovery is imminent.”

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For investors who are in this for the long haul — with one year being the minimum investment horizon — then the scenario is vastly different. Asian stock markets are generally expected to outperform US and European markets over the long run. The reasons for this optimism is plentiful, including the region’s relatively strong domestic consumption, sound fiscal position, ability to counteract external shocks with central bank reserves and fiscal spending, less dependence on exports, stronger financial systems, and so on and so forth.

Halbis Capital Management, for one, has kept its bullish long-term view of Asian equities intact.

“Overall, we believe the market is showing signs of stabilisation that should allow bottom-up investors such as ourselves to focus once again on picking the right stocks,” says Ayaz Ebrahim, Hong Kong-based CEO of Halbis Capital Management. “In the last few months of turbulence, investors have focused more on shifting between defensive and cyclical sectors rather than assessing the fundamentals of the companies themselves.”

Still, even for long-term investors, fund managers and analysts are sounding out the alarm bells and warning against chasing the momentum. Waiting for that correction is seen as the best option.

“It is very hard to predict how equities will perform over the next 12 months, particularly following such a strong rally,” says Peter Elston, Singapore-based Asian strategist at Aberdeen Asset Management. “We are still in a period of economic turbulence, in which conditions in the short- to medium-term may either improve or deteriorate unpredictably.”

Alex Ingham, a London-based emerging markets fund manager at Aviva Investors, believes that a pause in the current rally is “almost certain”.

What investors should be mindful at the present are the changes in fundamentals of listed companies, risk tolerance of investors and company-specific outlook. These are the factors that will shape the investment landscape going forward.

“We are beginning to see some discrimination emerging in the markets, different sectors and businesses are starting to demonstrate their ability to either recover more quickly or improve their cost competitiveness,” says Colin Ng, the Hong Kong-based regional head for Asia-Pacific equities at MFC Global Investment Management, the asset management arm of Manulife Financial.

Structural return on equity and earnings growth potential remains higher in Asia than in the world’s developed markets, says BlackRock’s Scott, who like many fund managers is particularly optimistic on the long-term prospects of China and India.

“China of course is the focal point,” says Victor Lee, Hong Kong-based regional investment manager at JP Morgan Asset Management. “We may indeed see China outperforming global markets as the fiscal packages continue to gain traction. It has strong deposit base and fiscal power to keep its economy on track.”

Scott says the strengthening links between China and Taiwan may also throw up some interesting opportunities as mainland companies acquire stakes across the Strait. He believes that India’s economy has cooled as foreign funding has dried up, but that has created some insulation from the collapse in global demand.

Not everyone’s a fan of China.

Desmond Tjiang, Hong Kong-based CIO for Asia ex-Japan equities at Fortis Investments, is wary of the rally in Chinese shares and doubts it is sustainable.

“The consensus overweight in China is a risk because that market is overcrowded,” says Tjiang, who is bullish instead on Indonesia. He believes that the strong domestic consumption in Indonesia, citing that country’s urbanisation, infrastructure, and domestic consumption trends.

Rajiv Jain, managing director for international equities at Vontobel Asset Management in New York, says the notion that Chinese domestic demand is going to rescue the region in fiction.

“Chinese domestic consumption is less than that of the UK,” Jain notes. “An increase there isn’t going to move the needle.”

Worse, it’s in China where the greatest overcapacity exists in areas such as steel and cement. China’s infrastructure spending program is good at boosting GDP figures by adding capacity, but does nothing to help corporate profitability.

Moreover, Jain is sceptical about the ability of government stimulus programs to ultimately boost corporate earnings.

“We don’t trust any government. Why do investors have such confidence in Beijing? Chinese steel companies are being instructed to produce more and not lay off workers, at a time when capacity utilisation rate are at their lowest in 50 years.”

Too many investors are mesmerised by the Asian growth story, but Jain calculates that over the long term, Chinese corporate earnings growth rates have been about the same as America’s — but Chinese stocks are priced far more ambitious.

Jain says the past five years were a bubble and have clouded investors’ expectations about growth in China and other Asian markets. The argument that Asian corporate balance sheets are strong is fine for bondholders but doesn’t equate to earnings growth.

Source:AsianInvestor, 03.07.2009 by Rita Raagas De Ramos

This is an excerpt from a story that originally appeared in the June edition of AsianInvestor magazine. To learn more about the content in the magazine, please contact Stephen Tang at stephen.tang@asianinvestor.net

Filed under: Asia, China, Hong Kong, Indonesia, Korea, News, Risk Management , , , , , , , , , , ,

• 8:59 am 1

China apologises to Mexico for swine flu handeling

China’s Health minister Chen Zhu Friday apologised to his Mexican counterpart for failing to warn him about the tough measures Beijing imposed on Mexicans to combat swine flu.

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In New Theory, Swine Flu Started in Asia, Not Mexico, NYT 24.06.2009
Investors: Be alert, but not alarmed, over swine flu, AI, 04.05.2009
Swine Flu? A Panic Stoked in Order to Posture and Spend, Guardian 01.05.2009

“I regret that I did not talk first” to minister Jose Angel Cordova, Chen said on the sidelines of a meeting in Cancun about the swine flu pandemic.

Beijing quarantined dozens of Mexicans at the height of the A(H1N1) outbreak, cut flights to Mexico and barred pork imports.

The measures were angrily denounced in Mexico, which was the centre of the swine flu outbreak that has since spread around the world, and been declared a pandemic by the World Health Organization (WHO).

In May Mexican authorities had to charter a plane to repatriate 136 of its nationals from China after they were thrown into isolation.

Chen said such measures were not aimed “against the people” but sought to “reduce the number of infections linked to international travel during the first wave of the pandemic and to win time to battle an imminent second wave.”

He also thanked Mexican authorities for sharing information about the flu outbreak in a transparent way, “which helped trigger the international reaction.”

The A(H1N1) virus has already infected some 77,201 people in 120 countries and led to 332 deaths, according to the latest WHO figures.

Source: IntelliAsia, AFP News, o6.07.2009

Filed under: Asia, China, Latin America, Mexico, News, Risk Management , , , , , , ,

• 8:35 am 0

India: The dark side of the emerging powers

India is the up-and-coming superpower that much of the world loves to love. But not, of course, everyone. Not environmentalists pushing for stronger climate change treaties. Not India’s smaller neighbours. Not Burmese democracy activists, appalled by New Delhi’s embrace of their country’s military rulers.

But by and large India is seen as a “good” emerging power – in implicit contrast to China – by virtue of its noisy democracy, which through largely credible elections has repeatedly allocated and transferred national and state power.

India’s global image also trades on its deep reserves of soft power, especially its export of charismatic gurus and yoga masters preaching peace, love, tolerance and harmony – values that the political establishment often manages to portray as intrinsic to society at large and the state itself.

Yet India has a dark underbelly in which state and society often fall dreadfully short of the liberal, democratic ideals they profess; where law shields the powerful and persecutes the weak. It is this that Arundhati Roy, the Booker Prize-winning novelist and prominent social activist, seeks to draw attention to in her provocative new book, Listening to Grasshoppers.

The book is an uneven collection of essays, opinion pieces, speeches and other writings published between 2002 – when an estimated 2,000 Muslims were massacred in the western state of Gujarat – and the aftermath of last November’s terror attacks in Mumbai. Roy calls the collection “a detailed under-view” of the darker side of the world’s largest democracy – or what she describes as “the cunning, Brahmanical, intricate, bureaucratic, file-bound ‘apply-through-through-the-proper channels’ nature of governance and subjugation in India.”

Roy paints a grim picture of India as a society of unaccountable political elites, a malevolent law-enforcement system, a rapacious emerging middle-class and a deeply-alienated impoverished mass, battling to avoid dispossession from their land.

She points accusing fingers at corporate India for its greed and for its silence about human rights atrocities, at the media for ignoring the crisis she sees unfolding in the country, and at right-wing Hindus for channelling public anger into religious intolerance.

The main essays focus on the Gujarat riots, the arrests and trial of Muslim suspects after the 2001 attacks on the Indian Parliament, the de facto military occupation of Muslim-majority Kashmir, and the Mumbai attacks.

And although Roy, who sits firmly within India’s radical left tradition, claims she has no Big Theory – no overview – of modern India, she does offer up one big idea. In a strand running through several essays, which suffer from repetitiveness, she argues that the rise of Hindu nationalist extremism was inextricably linked to India’s market-oriented economic development project of the past two decades.

“While one arm is busy selling off the nation’s assets in chunks, the other, to divert attention, is arranging a baying, howling deranged chorus of cultural nationalism,” she proclaims in the transcript of a 2004 lecture about the then-ruling Hindu nationalist Bharatiya Janata Party.

The essays were written before the recent Congress party victory over the BJP, the Hindu nationalist party’s second consecutive electoral defeat – and its worst electoral performance in years. But Roy’s introduction makes clear she takes little comfort from that, given her gloomy view of Congress, most other arms of the Indian state – and Indian society.

She rightly points to India’s persistently high rates of malnutrition, and rising tension over land, raising the question of whether India has either the capacity or will to improve the lives of its poorest citizens.

Yet her sweeping denunciations of India’s privatisation efforts make it seem as though New Delhi was callously dismantling the Swedish welfare state.

She dismisses the economic boom as having merely created “a vast middle class punch drunk on sudden wealth and the sudden respect that comes with it – and a much, much vaster desperate under class”.

There is little doubt that Roy, with her eloquence, concern for the poor, and personal magnetism, is an important voice in the Indian public sphere.

But the danger is that her extreme views – and her fierce hostility to a liberalisation programme that many Indians credit with dramatic improvements in their own lives – will alienate those whose support will be essential in India’s struggle for social justice in the years ahead.

Read full article “Listening to Grasshoppers” here.

Source: Financial Time, 05.07.2009 by Amy Kazim

Filed under: Asia, Energy & Environment, India, News, Risk Management , , , , ,