Why Asian equities are about to take off

Asia accounts for half the world's economic growth at present. All investors are familiar with the China story, but which other Asian countries are worth investors' attention? And what are the risks?

The view from the window of my newly-acquired apartment in Chiang Mai, Thailand's second city, is one of furious, noisy activity. Right through the weekend and throughout the nights, teams of helmeted, smartly-uniformed construction workers are beavering away building a huge hotel for Shangri-la, the luxury hotel chain.

Scenes of intense focused activity such as this are to be found everywhere across the region that now accounts for half the world's economic growth. This year alone, emerging Asia's economy will expand by 8.3 per cent.

Asian equities: look beyond China

The leader is China, now the world's fourth biggest economy, with imports growing faster than those of all Europe, and foreign reserves about to hit $1 trillion.

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But Asian dynamism is a broad-based phenomenon:

- India's industrial production is growing so fast it could double in just six years, driven by the demands of a burgeoning middle class, infrastructure spending and foreign buying.

- Vietnam, with entry into the World Trade Organization about to sweep away barriers to its exports, seems set to be the next Asian tiger, with what investment banker Christopher Woods calls "a smart, hardworking and disciplined population in the midst of a capitalist boom."

- Even Singapore, already rich, has an economy now growing at a rate of 8 per cent, with a focus on development of high-value specialized sectors such as Swiss-type private banking services, biotechnology and medical tourism.

Asian equities: direct investment

Asia has become a magnet for international investment on a mind-boggling scale. And the money isn't just going into China. Last year Southeast Asia attracted $38 billion of foreign direct investment into factories and business operations.

In its latest World Economic Outlook, the International Monetary Fund says that what sets successful Asian countries apart from those of Latin America and Africa in terms of development is its investment in physical and human capital, and its greater efficiency.

The Financial Times commented last week: "The success of Asia in securing efficient modern companies stems from stable macroeconomic policies, including fiscal prudence, relatively stable banking systems, a rapid integration into the world trading system, large initial agricultural sectors, and reasonably effective public institutions."

I have been visiting, researching and writing about the Far East for 42 years and believe that the region's phenomenal economic growth has been driven by a combination of many factors, including continuing strong commitment to traditional values such as hard work, thrift, group loyalty and reverence for education.

In contrast to most other parts of the world, where the political focus is scrapping over how existing wealth should be distributed, there is a singleminded focus on wealth creation because "a rising tide lifts all boats" - with a dynamic symbiosis between government and private-sector business.

Asian equities: at risk from a US slowdown?

Currently international investors' main concern about Asia is that slowdown in the US, whose overborrowed consumers and troubled residential property sector account for a quarter of global demand, combined with rising global protectionism, could deliver a devastating blow to Asia's export-focused economies, and to China in particular.

I think that risk is seriously overstated, because:

- With its modern factories and highly productive work forces, Asia is best positioned to survive tougher international markets. Indeed, more difficult conditions could motivate businesses elsewhere to become even keener to seek cheaper goods and services from Asian sources.

- Already dominant in labour-intensive, lower-value sectors, emerging Asia is starting to diversify into high-tech areas where Japan has long been a formidable competitor. One example that caught my eye is China's invention of a magnetic levitation wind-power generator that runs at half the cost of current wind turbines.

- Asian companies have become phenomenally profitable and carry little debt, providing them with great resilience against business downturn. The World Bank estimates that the annual return on equity of private-sector business in China, for example, rose from 7.4 to 16 per cent over the 1998-2005 period. Almost three-quarters of enterprise investment in China is now financed out of retained earnings, which rose from 5 per cent of GDP in 2000 to 20 per cent in 2005.

- Political priorities in China, such as the need to create millions of extra jobs every year, spread wealth from the booming cities to deprived rural areas, and to use the 2008 Olympics as a showcase to the world, make it certain that the government won't risk an economic slowdown. And it has the resources to do that by boosting domestic demand to offset any fall in exports, if necessary.

- Growth from trade within the region is becoming increasingly important for Asian exporters, and that trend will gather pace as the exploding demand of emerging middle classes for homes, cars, furnishings and consumer electronics provides increasing counterbalance to export demand.

Asian equities: predictions

My expectation is that Asian stocks will be the principal beneficiaries of the coming pick-up in global equity markets. The simplest way to join the party is to invest in a really good emerging Asia fund such as the London-listed investment trust Aberdeen New Dawn, which I see my friend David Fuller has been buying again.

I am sure that, fashions being what they are, India will once again be a leader in this coming recovery. But you might consider opportunities elsewhere that could become new leaders.

One is China, which has been a dreadful performer in recent years for various reasons, but where good returns this year suggest the bourse may be coming right for foreign investors. JP Morgan reckons corporate earnings growth and rerating together offer potential return for China of perhaps 20 per cent over the next 12 months.

For individual investors, the easiest way to take a stake is to buy units in the New York-listed FTSE/Xinhua China 25, an exchange traded fund up 29 per cent year-to-date that mirrors the shares of the 25 largest and most liquid Chinese companies. Incidentally, they are mainly geared to domestic markets and therefore less sensitive to any downturn in the US.

Another interesting opportunity is Vietnam, which is about to experience a tidal wave of incoming foreign investment. Among the funds to consider are Dublin-based Vietnam Enterprise Investments, and two London-listed ones - Vietnam Opportunity and the new Swiss-backed Vietnam Holding.

By MartinSpring in On Target, a private newsletter on global strategy