Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Andrew Graham, fund manager, Martin Currie Pacific Trust.
I am cautiously optimistic – Asian economies have come a long way from the depths of the global crisis of three years ago. Equities have performed strongly and Asian markets have just posted their best first-quarterly performance since 1991.
But there are also good reasons to be cautious – the main one being that the global economy is still struggling. This year, even Asian economies are slowing, albeit only slightly. I expect the region excluding Japan to post growth of 6.5%, down from 7% in 2011. That said, with the US potentially managing to expand by 2.5% this year, and Europe as a whole struggling to deliver any growth at all, Western policymakers can only look on with envy at the growth coming out of Asia.
In the Pacific region, we’re seeing reasonable growth being delivered against a backdrop of relatively benign domestic conditions. Core inflation has been dropping, giving governments the scope to pull the monetary policy levers if needed – some have already done so, albeit tentatively.
Another positive for the region is that, unlike most of their developed-world peers, Asian governments also have room on the fiscal side to boost their economies. But we wouldn’t expect to see the Chinese make the same mistakes they did in 2009, when they over-stimulated their economy.
This year’s rally in the stockmarket has left valuations only a little below long-term averages in price-to-book terms. But there are two reasons I still think the region’s equities in aggregate are good value. First, returns on equity and on total debt and equity capital are at elevated levels compared to previous cycles, so an investor is being better rewarded for owning Asian stocks. Second, I sense that the process of analysts downgrading their profit forecasts is coming to an end, as we’re now seeing some forecasts being revised upwards.
At the stock-specific level, we are capitalising on three big themes. First, we still see huge potential in the powerful structural changes in the region. The spectacular movement of great swathes of the population from relative poverty into the middle classes is moving spending away from mere subsistence to a much greater array of goods and services. Firms such as AIA (HK: 1299), which has operations in 15 Asian countries, are growing on the back of an increased demand for insurance services.
Next, Pacific-region countries are now becoming less dependent on the West for trade. Although the West remains an important market, we’re seeing a corresponding pick-up in activity between countries in the area. One firm to benefit from this trend will be Australia’s QR National (AU: QRN). It runs the rail networks that help shift coal from mines in the interior to ports from which it is shipped to countries such as China.
We are also seeing Asian businesses emerging as leaders in their own right at a global level, particularly in technology. Companies such as Samsung Electronics (LI: SMSN) are racing ahead of rivals and generating very attractive returns on capital. This enables them to become more competitive in each cycle by reinvesting capital in their operations and in research and development.