A healthier banking sector and lower levels of consumer debt will help Asian and emerging market funds perform better in the downturn than western market funds, according to asset managers. They argue that emerging markets are less exposed to the drying up of credit, and their governments have the power to invest in infrastructure and property to help stimulate their economies.
While developing countries are by no means immune from the economic downturn, they may prove more resilient than more established markets such as the UK, US and western Europe.
Asian populations tend to have much higher levels of personal savings, while companies have not taken out so much debt.
“Asia has a number of issues that are quite different to western or developed markets,” says Douglas Cairns, investment specialist at Threadneedle.
“Banks are in a strong position, with strong loan ratios and very limited direct exposure to subprime. Some countries are seeing sharply lower growth but compared with developed markets, they are relatively resilient.”
He acknowledges that Singapore, Hong Kong and Taiwan are experiencing negative economic growth, while the latest growth figures for China showed a sharp fall in output. But he believes these areas could be better placed to survive the downturn.
“The structural growth story remains in place, particularly in China. Infrastructure spending is helping to underpin economic resilience and consumer spending is still up on the previous year,” he says.
But asset values across Asia have suffered sharp falls in the last year, following a strong performance in 2007. Asia Pacific (excluding Japan) funds and investment companies lost a third of their value in 2008, while stock markets in the region fell more than 40 per cent. By contrast, the average UK equity income fund fell 29 per cent last year, while North American funds dropped 18 per cent, according to the Investment Management Association.
So some managers believe company valuations, particularly across Asia, now represent good value. One advantage is that eastern markets tend to have a much lower reliance on credit.
“The credit activity in the west inflated prices and created an illusion of prosperity,” says Nick Price a portfolio manager at Fidelity.
He believes the countries that did not experience a credit bubble to the same degree as the UK and US could emerge first from the downturn.
“China is in a better structural position than the UK and western Europe,” he says. “It is going through a hard time and it will feel a dramatic impact from the slowdown in consumption in the west but the government is in a good place to support domestic infrastructure and chinese consumers are not saddled with so much debt.”
China and other Asian countries including Korea, Taiwan, India and Indonesia, have announced economic stimulus packages focused around improving transport infrastructure.
That leaves the Asian infrastructure sector well positioned to outperform the overall market in the first half of this year, according to Mirae Asset Global Investments, the Asian asset management company.
“Current market conditions provide the Asian countries with a golden opportunity to take advantage of the commodity price correction to improve their infrastructure and boost long-term competitiveness,” adds Raymond Cheng, manager of Mirae’s Asia Pacific Infrastructure Fund.
Even so, investors have to weigh up whether the value offered by some emerging markets is attractive enough to counter the risks.
Mike Kerley, who managers the Henderson Far East Income investment company, believes China will increase its gross domestic product by at least 7 per cent over the next year. “When you consider what’s happening in the rest of the world, this will make it stand out,” he says.
He adds that China now has a more diverse export base and should also benefit from its stance as a low-cost producer.
But Hugh Young, managing director of Aberdeen Asset Management Asia, feels China can no longer depend on cheap exports because external demand has collapsed. He expects more volatility in equity markets in China and Hong Kong as their economies weaken.
Potential investment opportunities are also arising in Japan, where the economy has rapidly deteriorated.
“The tension in the Japanese market is between a poor economic outlook and attractive valuations,” says Matthew Brett of Baillie Gifford Japan. “The market is very lowly rated, with the majority of stocks trading below book value.”
Investors who do want to take advantage of value in eastern markets are being advised to move cautiously.
“Although valuations are looking attractive, I would not do more than dip a toe in the water,” says Mick Gilligan, head of research at Killik & Co, the stockbroker.
He feels it is hard to envisage a recovery in Asian markets until there is a meaningful return of appetite for risk.
One concern is the disappearance of foreign direct investment into these areas, particularly India.
“Investors have been deleveraging and taking money out. It is going to take more time before they go back in,” says Gilligan.
