Asia leads way in international equities

China

Asia, driven by the Chinese economy, is being rated as a strong performer in international equity markets for the next couple of years.

Perennial Investment Partners head of Asian equities Kerry Series says China is very hot in investment terms.

“China is one of the fastest growing countries in the world and a significant importer,” he says.

“The Chinese economic story has fuelled news stories and underpinned the profit outlooks of regional companies.”

China’s 2003 growth rate was more than 9 per cent, according to official figures. There has always been a problem with obtaining accurate growth figures for China as the Chinese Government tightly controls the flow of information.

But Goldman Sachs JBWere Investment Management chief executive officer Michael Clarke believes the figures might be conservative.

“China’s growth is extremely strong and it may be stronger than the official statistics,” he says.

“The Chinese authorities have been making comments about slowing down the economy.”

Series says there is little doubt China will be the engine for Asian economic growth in the mid to long-term as its burgeoning middle class develops an appetite for consumer goods.

“Strong economic growth in China also presents vast opportunities for inter-regional trade, making the entire Asian region highly attractive,” he says.

Clarke says there are a number of interesting statistics that confirm China’s role as the powerhouse of Asia.

“China’s iron ore imports are up 30 per cent and it is the largest steel producer in the world,” he says. “China also contributes about 25 per cent to global growth and about a third of Japan’s exports go there.”

Clarke says China has replaced the US in the Asian region as an economic driver.

“China has become a global growth engine in its own right,” he says.

Perennial’s confidence in Asia is largely due to the restructuring companies have endured since the Asian financial crisis, Series says.

“Asian companies, after years of fiscal discipline, have low debts and are now geared for capital expenditure. Many have net cash on their balance sheets and no need for fresh business investment due to the excess capacity that had been built up,” he says.

Many Asian companies are also booming as they export their goods and services to China.

“The whole region contains companies that have the best potential for getting into China,” Series says.

“Many of these companies are run by Chinese, which is an advantage.”

Invesco’s Global Matrix fund management style has allocated 7 per cent of its portfolio to Japan, which is very small compared to its weightings in North America (55 per cent) and Europe (28 per cent). It is an investment style based on finding the best stocks in each industry worldwide.

Series says most global fund managers still invest close to benchmark weightings, with about 60 per cent of their asset allocation directed to the US.

“Investments into Asia tend to make up less than 2 per cent of such a portfolio,” he says.

“Given the divergence in economic growth being experienced by these two regions, asset allocations do seem skewed.”

Series argues this is borne out by investment returns.

“The median diversified global shares manager has returned negative 3.1 per cent per annum during the last five years, whereas the median Asian (ex Japan) shares manager has returned 10.5 per cent over the same period,” he says.

“A compelling argument also for allocating funds to specialist regional mandates, rather than being overexposed to underperforming regions.”

United States

The argument for a heavy weighting in the US can be justified by growth potential in the next couple of years, Clarke says.

Part of this can be attributed in the short-term to the US Government pumping millions of dollars into the economy because of the presidential elections due in November.

“There is a standstill in the US labour market, but the inflation risk is low and that is good for stocks,” he says. “The real risk issue in the US is the budget deficit and that is a three to five-year risk.”

Series sees a slightly bleaker picture developing in the US.

“Over-investment in the tech bubble has seen US companies, as well as consumers, taking on debt and running large current account deficits,” he says.

“Taking a cyclical perspective, Asia appears to be on the way up, with the US having already reached its highs.”

But this must be set against a stronger global economy.

Clarke sees the global economy as very strong with few risks on the horizon.

“We see global GDP running at 4 to 5 per cent this year and easing slightly to 4 per cent next year,” he says.

“We are not predicting any dramatic growth over the next two years based on US interest rates staying where they are.”

Europe

The global weak area is Europe.

“Europe is lagging,” Clarke says, “partly due to the strong Euro against the US dollar.”

Another reason behind Europe’s slower growth is that European countries have taken a more conservative approach in managing their economies than the US.

Clarke says there will be further rate cuts in Europe, which might stimulate growth.

Japan

Another laggard in the global economy has been Japan. Each time, the growth predictions have disappointed.

But Japan is back in favour again with global fund managers. Series says he is looking at Japan again as there is value in its markets.

The crux of investing in Japan is waiting for profitability to improve.

“Japan is a waiting game,” Series says.

“But I would rather invest in their stock market and wait.”

Clarke says Japanese export figures are looking good, although debt is still a problem in the country.

“Japan’s exports have been driven by US growth, which means Japanese GDP growth is on the agenda again.”

Favoured sectors

While Asia is the favoured region to invest in, this has also influenced investment by industry type.

Invesco has favoured financial and healthcare companies as growing sectors for investment. The company has 22 per cent of its portfolio in financial companies and 13 per cent in healthcare.

Other favoured sectors include companies connected with consumer discretionary spending and information technology.

Clarke says the energy sector is one to watch as the demand for power grows globally, especially in China.

“Healthcare has had a difficult period, but there is still good long-term growth potential,” he says.

Clarke says the technology sector has enjoyed a strong run in the US with improvements in workplace productivity and is poised for further growth, but at a slower rate.

While there is a positive view on the global economy, it is not without risk. Clarke says terrorism is the greatest threat to the economy. Series says the risk concern for Asia is the geo-political environment.

“The market’s response to SARS, the North Korean crisis and the Iraqi conflict confirm that geo-political issues do influence market reactions,” he says.

“These concerns have held investors back from investing in Asia, resulting in a valuation discount relative to other major global markets.

“Given the better growth prospects in Asia, and the influence of geo-political factors on all markets, this discount seems unjustified.”