In the immediate aftermath of the downgrade of US sovereign debt by S&P when investor confidence was already low and risk aversion very high, the region suffered heavy falls ranging from between 2% and 5%. Indonesia, Singapore, South Korea and China were among the worst decliners with the latter market down as much as 21% from its November high and reaching the conventional definition of a bear market.
A two-speed world
However, the sell-off was fairly indiscriminate, with losses recorded across all industry sectors. And dramatic sell-offs tend to be followed by rallies with the ensuing volatility producing a number of buying opportunities.
We are starting to see signs of Asian markets paring earlier losses and the oversold situation has started to attract bargain hunters, making the most of robust fundamentals and historically attractive valuations levels. Across the board, our investment professionals are finding companies with attractive growth potential trading at reasonable levels.
Indeed, Asian equities could well be the winners of the current environment. Most Asian central banks have been tightening monetary policies in the last few quarters. They will have the flexibility to relax interest rates and credit policy to offset a potential marginal downward revision in OECD growth. Asia’s healthy financial system, robust domestic demand, low debt levels and high savings rates will continue to support a multi-year growth cycle.
A recent IMF report also indicated that US investment portfolios on average only have 1.7% of their international exposure allocated to Asian equities compared with 6.8% in Japan. Likewise, European portfolios have just 2.2% in Asian equities versus 9.4% in the US. This under-investment is unlikely to last as vastly superior economic growth prospects in the region make it a preferred asset class in the medium to long term.
Emerging Asia
One thing to be mindful of, however, is that a further weakening of the dollar could result in a hit on Asian exports. While there is more emphasis on domestic spending (particularly private consumption) as a key driver of GDP growth, it will still make a difference. As such, Asian authorities are expected to closely monitor currency movements and are likely to implement suitable currency-related measures if needed.
The prospects of a slower recovery in the West should make emerging Asian growth rates look even more attractive to investors. In addition, the fall in commodity and oil prices should further ease inflationary pressures, and in particular improve India’s fiscal position due to a reduction in import costs.
We believe Chinese equities could be among the first ones to come out of the market correction and could be the market out-performers in 2011, similar to what had happened in 2009. On the economic front, the global economic downturn should accelerate the peaking out of China’s inflation. Accordingly, China’s CPI should start to decline in the fourth quarter.
In the weak global environment, the Chinese authorities could also move to a more accommodative stance which would also be positive for Asian equities generally.
