Investors in Asian equities take note

Stuart James

Although Asian economies remain fundamentally sound, investors need to be alert to three key risk areas, according to Sydney-based Aberdeen Asset Management.

Aside from the uneasy global credit market in the wake of the sub-prime mortgage meltdown, Aberdeen said investors in Asian equities need to bear in mind that many shares are still overpriced, that a recession in the United States is likely to have a significant negative impact on Asia’s export-related companies and that rising inflation will increase costs for companies and possibly lead to important changes in policy.

According to Aberdeen, recent declines in Asian equities were well overdue.

“Given the high levels of capital inflows into Asia’s markets last year, it is not surprising that share prices have fallen recently,” said Aberdeen associate director Stuart James.

“The US economy continued to be fragile following the credit problems and concerns over slowing growth. Therefore, we are expecting a degree of market nervousness to continue, with Asian investors increasingly cautious, watching for signs of an export-led slowdown.”

However, James stressed that Asian economies are still fundamentally sound, with growth expectations similar to this time last year.

“Robust domestic demand and the scope for fiscal stimulus, given the relative strength of the region’s economies, means Asia is better positioned to weather these external forces than in the past.”

James said investors would be wise to focus on company fundamentals, seek high quality investment opportunities and avoid the more speculative and cyclical stocks, which he believes are overvalued.

“Market volatility actually allows us to use price weakness to add positions in these high quality companies. This high-conviction contrarian approach has served us well during past periods of uncertainty and allowed us to outperform during the recent corrections.”