Market Insight: Rich pickings in Asia

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Asian stocks have this week returned to levels last seen in March 2000, after enjoying a strong run on the back of robust economic growth and the removal of uncertainty following the US presidential election.

The latest upswing caps a volatile year and means Asian markets have finally recovered from a big sell-off in April and May.

Local politics promised to play a big part in the markets this year, with elections in Indonesia, the Philippines, Malaysia and Australia dominating the headlines in turn. But the outcomes, while essentially market-positive, have had relatively little impact on share prices compared with more global economic influences.

The MSCI AC Asia Pacific ex-Japan index has surged 8 per cent in the past three and a half weeks to reach 248.79 on Tuesday, just shy of Monday's high of 249.45. This follows the global improvement in stock market sentiment after US president George W. Bush's re-election. The market is now above its April 12 peak of 241.09, having more than recovered from a 17.3 per cent drop in April and May that stemmed from higher US interest rates, a possible slowdown in China and higher oil prices. These worries have either blown over or, in the case of oil prices, been factored into valuations. For the year to date, the market is up 12.6 per cent.

Asia's developing countries can expect growth of around 8 per cent in 2004, according to a World Bank report last week, due to strong export demand, a cyclical rebound in the IT sector and the return of fixed investment spending.

Domestic demand is also fanning growth. Corporate earnings have trickled down to household incomes and the growing middle class, especially sizeable in China and India, is clamouring for consumer products.

But has growth peaked? The World Bank seems to think so. Growth in the region will slow to around 6 per cent in 2005 as countries face a downturn in high-tech sectors and a possible US recession, it said in the report.

Doomsters are advising an early exit from Asian equities.

“If you're looking for short-term gains, you should be aware of a potential collapse in stock prices between the next three months and the middle of 2005 as the US market crumbles under the nation's unsustainable debt burden,” said Puru Saxena, president of Bridgewater, a financial planning group based in Hong Kong.

He remained confident of the emergence of China and Asia as a dominant economic power but warned that investors buying Asian assets today would have to wait 10 years to reap any substantial reward.

“There remains a close correlation between Asian share prices and US stocks at the moment,” he said.

Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, has a rosier view.

Asian stocks will not see a repeat of the year-long rally in 2003 when international investors returned seriously for the first time since the 1997-98 financial crisis, he said. Instead, the region's markets will see a series of mini-cycles dictated by sectoral trends rather than big ups and downs, tracking a 3-5 per cent return among global equity markets and outperforming cash.

China is the engine of growth for the region, he said, but investors should buy into companies that export to the country rather than H-shares that are quoted in Hong Kong.

“We remain wary of the level of corporate governance and the return on equity among Chinese companies. They also face an incredible amount of competition from their local peers.”

The energy and mining sector in Australia, for example, is a better bet. He also recommends Japanese players supplying machineries to China.

Mr Saxena concedes that careful picking among Asian stocks may still see 10-12 per cent returns in the next few months.

“I would buy commodities companies, makes of consumer goods, and [from] the infrastructure sector,” he said.

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