Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Andrew Graham, manager, Martin Currie Pacific Trust.
Stockmarket investors tend to be optimists. But even the blindest optimist might struggle to predict an easy ride for global equities in 2012. The problems facing the West need no introduction. Although the US economy is showing signs of life, Europe remains mired in its debt crisis.
For Asia, the slowdown in Western end-markets is an obvious problem; investors have been trying to discount this for months and have cut their growth estimates for economies and earnings. Inflation Asia's bugbear in 2011 does seem to be receding, giving policymakers room to respond to macroeconomic weakness. So interest rate cuts are possible, but likely to be limited.
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Besides the economic uncertainties, Asia faces political ones too. This year there are elections in Taiwan, South Korea and India, and Malaysia's 2013 election could be brought forward to 2012. In October, China will get a change of leadership. All of this is likely to create significant volatility in market sentiment.
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Why then, after a tough 2011 for Asian markets, are we at Martin Currie relishing a difficult 2012? Well, after discounting much of the expected bad news, equity valuations are already attractive, at around one standard deviation below their long-term averages. So, for those with at least a medium-term view (two to three years), the outlook for returns is good.
However, Asian equities are not yet factoring in a severe recession. Should they turn more pessimistic, valuations could well slip another standard deviation below historic averages which would be equivalent to a 15% fall in market indices. That has happened only four times in the past 20 years. But each time, investors buying at those levels have been richly rewarded. So any dip towards that territory would represent an outstanding opportunity.
How, then, should investors in Asia position themselves? We currently see three main themes. First, the rise of the Asian consumer will continue. Despite the uncertainties, consumer-facing firms with strong franchises and healthy balance sheets have undiminished long-term prospects. China's Tsingtao Brewery (HK: 168) is a good example.
Thanks to the strength of its premium brand, the company has increased its share of the Chinese beer market from 5% in 2000 to 16% today. China's beer industry is still highly fragmented. With its net-cash balance sheet, Tsingtao is well positioned to benefit from increased pricing power and operational efficiencies as consolidation continues.
Second, some of the slack from constrained Western demand will be taken up by trade within the Asia-Pacific region. And as intra-Asian trade increases, a broad swathe of financially strong companies should benefit, in industries ranging from infrastructure to financial services. One example is China Merchants Holdings (HK: 144), which operates ports and freight businesses.
The third theme is negative. Asia's banks have enjoyed an extended period of good credit quality. As many Asian businesses particularly smaller firms struggle with tougher conditions, this could deteriorate; already, there have been widespread reports of bankruptcies among China's small and medium-sized enterprises. Investors must watch for further signs of difficulties.
But while it could be a tough year, Asia's long-term growth story remains intact. The outlook should brighten in the second half as a 2013 recovery comes to seem more certain.
