A True Believer in Asia
09/18/2008 12:00 am EST
Q. Your Asia Focus Fund and China & Hong Kong Fund have stellar three- and five-year returns, but have not been immune from the recent global market slowdown. Many commentators have forecast the end of the China “bubble,” cautioning that after the Olympics, China’s fortunes may suffer. But you disagree, correct?
A. I believe China’s growth prospects still look good in spite of the global slowdown. China’s economy has benefited in the past from an export boom, and this will be hit by slowing demand from the US and Europe. But we should not forget that China has a substantial domestic economy which, although linked to external trade, does not depend on it exclusively. The Olympic Games caused production to slow as factories were closed to reduce pollution during the Games, but we now expect that to pick up.
China’s prospects can still be heavily influenced by policy decisions which are backed up with significant reserves and budget surpluses. Since last year, the authorities have maintained a tightening bias as inflation rose to a peak of 8.7%. Now, [with inflation] at 6.3% in July and set to fall further, the government has shifted to a pro-growth bias. We expect to see some concrete announcements, which could include energy price adjustments to address the recent supply shortages of electricity and diesel fuel; tax boosts to support exporters; selected easing of bank lending controls, and slower currency appreciation against the US dollar.
Q. What is your near- and long-term forecast for the region?
A. We must accept that economic growth in the region will slow as demand for Asian export products falls. However, Asian economies are in a much sounder position than they were ten years ago and better than many developed economies are now. Exposure to subprime in Asia is minimal, while banks’ loan books are not under pressure. Whereas we are now waiting for nonperforming loans to increase in the US and Europe as consumption slows, the same is not true in Asia. Most countries have national account surpluses and levels of external debt that are well-contained. This gives central banks considerable flexibility in their response to tougher external conditions.
Q. What’s behind the huge drop in the Asian stock markets right now? Do you think that global investors are just missing the obvious positives or are the growth prospects deteriorating more rapidly than was expected?
A. The rapid decline is basically an accumulation of negative interest, due to deteriorating global financial conditions, particularly the turmoil in the US markets. As well, there are concerns about China’s growth slowing and worries that Chinese property markets are about to experience similar downturns.
I believe the concerns about China are massively overdone. There is no sign of a housing bubble, and most housing sales—unlike those in the US—are not funded by credit; they amount to just 10% of GDP, so the leverage problems are not there. Furthermore, there is good underlying support for demand. However, if there was a housing recession in China, there would be adverse implications for the construction and commodities industries.
Q. Which sectors do you believe have the most potential for investors in the next year?
A. We like domestic-oriented sectors and resources sectors because we see a steady growth in the number of consumers in Asia, especially in China. The projections for the numbers of people entering the so-called middle class (i.e., those with material disposable income) is growing. They want to buy homes and cars, which will drive demand for steel (needing coal and iron ore) and for construction, as well as oil for gasoline and diesel. Although these sectors have experienced significant volatility over the past two months, the structural story has not changed, and this is where we see the greatest potential.
Q. What are your favorite and least favorite sectors of the Asian markets, and why?
A. At this time, I like the coal miners. The supply of coal in Asia is very tight and will remain so. Many power projects are coming on line, especially in Korea and Japan, regardless of what is going on in rest of world. You don’t need a very demanding growth assumption for power demand in Asia to make the argument that coal supplies are tight. The underlying picture is that while equity prices of the coal miners are going down, the price of coal is going up, resulting in attractive equities.
On the negative side, we would expect export manufacturers to suffer most. This group extends from technology components and finished product producers to those producing more basic items. As well, I would, generally speaking, be cautious on commercial property.