Struggling Asian economies will resume their superior rates of growth in the second half of 2009, say money managers who specialize in the region, getting back on track as the global economic recovery takes hold. China, with its population of 1.4 billion, is the engine that will pull the Asian train.
And when the economic turnaround comes, the rebound will be quick, say some of those managers. Mark Grammer, vice president of investments with Mackenzie Financial Corp. <\/b>in Toronto, expects Asia to pass its economic bottom early in 2009. \u201cWhen demand for Asian goods comes back,\u201d he says, \u201cthe recovery will be more rapid and of greater magnitude than expected because of the depletion of inventories.\u201d
Eng Hock Ong, managing director of Singapore-based AGF Asset Management Asia Ltd., <\/b> also expects a quick rebound. \u201cThe macroeconomic fundamentals are strong in Asia,\u201d he says. \u201cIt\u2019s not like the Asian crisis of 10 years ago. Countries have low debt positions, foreign-exchange reserves have improved, banking systems are solid and corporate balance sheets are healthy.\u201d
China\u2019s economy is the region\u2019s leading indicator. (See story below.) In the longer term, the continuing urbanization and modernization of China \u2014 with the Chinese government\u2019s plan to create 200 cities with a population of at least one million each by 2025 \u2014 will stimulate growth for many years to come.
In the short term, China\u2019s US$586-billion spending spree over the next two years will stimulate inter-Asian trade in machinery and raw materials, going a long way toward mitigating the effects of the global malaise on Asia.
But despite these developments \u2014 and growing domestic consumption \u2014 the global slowdown is hurting Asian manufacturers that cater to Western appetites. Although Asian countries now export more to China than to the U.S., developed countries (including the U.S. and Europe) account for almost half of Asian exports. The longer the global economy is stuck in recession, the greater the impact on Asia.
As a result, money managers are focusing on defensive sectors such as telecommunications and consumer staples. They also favour sectors that stand to benefit from domestic activity \u2014 such as consumer durables, real estate and banks \u2014 and are steering clear of sectors with export exposure.
On a geographical basis, China offers some of the best opportunities in the region. But some managers are also keenly interested in lower-profile countries, including Thailand, whose outlook is clouded by political troubles and valuations are at rock-bottom levels.
\u201cValuations are extremely low in Asia after the dramatic stock market declines of 2008, and we are starting to nibble,\u201d says Lambros Piscopos, senior vice president of global equities with Natcan Investment Management Inc. <\/b> in Montreal. \u201cThe long-term growth story remains intact. There\u2019s no question that China is the straw stirring the drink in Asia, and it is in the best position of all countries to shelter itself from the difficult global environment. Its policies are designed to keep the domestic economy going, but it will support other parts of Asia.\u201d
Ong, too, notes that Asian markets are selling at a discount to developed markets despite their superior growth prospects. He expects money will flow into Asia again in 2009.
Yet K.C. Lee, Hong Kong-based portfolio manager of Fidelity AsiaStar Fund, sponsored by Toronto-based Fidelity Investments Canada ULC<\/b>, expects 2009 to be a tough year for Asian countries. Asian growth will cool from blazing hot to warm, he says, as Asian countries adjust to the impact of curtailed global demand for manufactured goods.
Lee foresees ongoing deflation globally, as the effects of excessive leverage are wrung out of the global financial system. \u201cChina and India were the hottest countries in Asia,\u201d he says. \u201cIt\u2019s logical to assume they are the countries with the most excesses to be cleared as the global credit bubble unwinds.\u201d
Asian consumers, Lee adds, will be reluctant to spend. Asians have typically taken a conservative approach to borrowing, and their fear of losing their jobs may introduce a new element of caution.
Chuk Wong, vice president of Toronto-based Goodman & Co. Investment Counsel Ltd. <\/b>and manager of Dynamic Far East Value Fund, sponsored by Dynamic Funds Ltd. <\/b>of Toronto, is more upbeat than Lee. Recent lower commodity prices are providing a reprieve from high costs, Wong says. In 2008, China\u2019s oil imports equalled 3.5% of gross domestic product; this year\u2019s sharply lower prices will translate into huge savings, not just in China but throughout the Asian economy. Commodity prices may turn higher later this year, however, once excessive inventory levels have been trimmed.
@page_break@Here is a look at some Asian markets other than China:
> India. <\/b>With about one billion people, India is the second-most populous country after China. India, however, is different from China. India\u2019s democratic government is less efficient than China\u2019s centralized, one-party regime. On the other hand, India\u2019s democracy fosters a culture of entrepreneurialism.
Money managers are less optimistic about India than China. The Indian government is operating at a deficit and can\u2019t spend as heavily as China on projects to grease the wheels of economic activity.
India does, however, have healthy foreign-exchange reserves and, with an election approaching in May, it is likely to \u201cpress the accelerator on infrastructure projects,\u201d says Gavin Graham, director of investments with BMO Asset Management Inc. <\/b>in Toronto.
Traditionally, India has placed less reliance on exports of manufactured goods than many Asian countries, including China, which means it is less affected by the global spending slowdown. Agriculture, for example, accounts for 20% of India\u2019s GDP.
Ajay Argal, the India-based portfolio manager of Excel India Fund, sponsored by Excel Funds Management Inc. <\/b>of Mississauga, Ont., expects GDP growth in India of 7% in 2009, down from about 9% in 2008. Inflation, which peaked at 12.9% in 2008, has dropped to 8.4%, giving the government some leeway to back off on its rate-hiking strategy and encourage lending.
\u201cWe are positioning the fund defensively in the short term,\u201d Argal says. \u201cThe fund has a bias toward large-cap companies with strong balance sheets and lots of cash.\u201d
Among Argal\u2019s favourites is Bharti Airtel Ltd., a telecom firm enjoying 25% annual growth in its subscriber base with potential to increase sales as it penetrates India\u2019s second-tier cities. As well, the domestic banking and financial services sector is a beneficiary of loan and credit growth; Argal likes ICICI Bank Ltd. in this sector.
Consumer nondurable companies selling soap, food items and tobacco to the domestic market, Argal notes, are benefiting from rising domestic demand. One company he likes is Hindustan Unilever Ltd.
Pharmaceuticals are also enjoying strong growth in both the domestic and export markets due to their competitive cost structure. Sun Pharmaceutical Industries Ltd. is Argal\u2019s pick in this category.
> Hong Kong. <\/b>As a major Asian financial centre, Hong Kong should benefit from the effects of lower interest rates, and several money managers are accumulating financial services stocks, including Bank of China (Hong Kong). Later in 2009, the property sector is expected to recover, benefiting companies such as residential developer Shimao Property Holdings Ltd.
> Singapore. <\/b>Trade-oriented Singapore is highly sensitive to external demand, and most money managers are taking a cautious approach until the global recovery is evident. Nevertheless, Singapore has some established blue-chip companies with high dividend yields.
AGF Asia\u2019s Ong likes Singapore Airlines; it is already the world\u2019s most profitable airline and will get a boost from lower fuel costs.
Ong also likes Sembcorp Marine Ltd., a manufacturer of offshore oil rigs; and DDS Bank, Singapore\u2019s biggest bank.
> Taiwan. <\/b>The technology industry is a mainstay in Taiwan and exports have been hurt. However, the drop in the stock market has served up some attractively valued companies that have high dividends and good long-term growth prospects, including Taiwan Semi-Conductor. But Ong is cautious on Taiwanese banks because they have greater exposure to U.S. subprime mortgage woes than do banks in other parts of Asia.
> Korea. <\/b>As a major exporter, Korea has been hit hard by the global slowdown. But a significant drop in the value of its currency relative to the U.S. dollar and the yen in 2008 is creating a competitive advantage for such giants as Hyundai Motor Co. and Samsung Electronics Co. At the same time, major construction companies in Korea could benefit from the massive stimulus program in China.
> Thailand. <\/b>Political uncertainties have made Thailand one of the cheapest markets in Asia and therefore one of the favourites of Lee, a value investor and contrarian. He is sticking to defensive industries such as telecom and utilities, consumer staples and health care. Other money managers are nervous about the continuing political instability in the country and are minimizing their exposure.
> Australia. <\/b>The resources-heavy Australian economy needs higher commodity prices before it can turn around. Mark Lin, vice president of international equities with Toronto-based CIBC Global Asset Management (Asia) Ltd. <\/b>in Montreal and manager of CIBC Asia Pacific Fund, is staying away from resources companies but has found some opportunities in the health-care sector.
Lin likes CSL Ltd., a pharmaceutical company that makes drugs and vaccines; Cochlear Ltd., a manufacturer of implants for hearing-impaired people; and Ramsay Health Care Ltd., a private hospital chain.\t IE<\/b>
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