Asian stock markets have taken a hit over the last quarter thanks to the sub-prime crisis, but analysts believe the fundamental story remains optimistic and Australian investors should not turn their backs on opportunities there.
Looking at the region as measured by the MSCI all country Asia ex-Japan index, equities were down 17.6 per cent in the last quarter, compared to a 12.6 per cent decline in the MSCI all country world index.
Stuart James, associate director of Aberdeen Asset Management Australia, believes the reason for this fall can be attributed to a change in investors’ risk appetite. “A lot of investors have made a lot of money over the last few years and have been trying to lock in some of those profits,” he says. In part, the sell-off can be contributed to investors off setting losses elsewhere in their portfolios.
According to James, nothing fundamental has changed in Asia. Rather, what we’re seeing is a flow of capital out of Asian markets and back into the US and the West. In essence, Asia is baring the brunt of a recent flight to safety.
However, some regions have performed worse than others, says Tan Eng Teck, investment manager with Treasury Asia. China, in fact, is one of the worst performing markets. Stocks are down almost 45 per cent from highs and about 20 per cent over the last three months.
Nevertheless, taken from a longer perspective China has witnessed phenomenal growth, with prices tripling over the last couple of years. “If you look over the last twelve months, China has not done badly,” notes Eng-Teck. But over a six-month timeframe, and from its highs, returns have been pretty dismal.
“The best performer is actually Taiwan,” according to Eng-Teck, who believes a positive election result, and stgeloping ties with China bodes well for the nation.
On the other hand, the Indian share market – an investor favourite over the past couple of years – has been hit by sell-offs.
Nevertheless, within markets exceptions can be found, such as LG Electronics in Seoul, which has outperformed the local bourse by a stellar 35 per cent year-on-year.
As far as Japan goes (and strictly speaking Japan is taken as a distinct entity, rather than being lumped together with the rest of the region) Rob Prugue, senior managing director at Lazard Asset Management Asia Pacific, says it as undervalued.
“The overall Japanese market is trading at historical low norms,” says Prugue. Take out the blue chip mega-cap names, such as Sony, Canon and Matsushita, and it appears even more undervalued, he adds.
So based on the recent turmoil, should investors be getting the heck out of Asia?
Aberdeen’s James sees no reason for investors to move out of the region in general. But he cautions that Asian markets might have more downside to come over coming months.
“The fact that Asia’s fallen more heavily in the first quarter than some Western markets where the problems actually lie makes it look more attractive on a relative basis than it did at the beginning of the year.
“But there’s probably further turmoil to come out of the credit crisis and further downward pressure on all world markets – and Asia will continue to suffer from that,” he says. “But as that filters through I think the long-term buy story only improves.”
As the year progresses, James believes that there is a “very strong opportunity” to boost exposure to Asia and emerging markets in general. Putting it bluntly: “I’d rather be in Asia than anywhere else over the next three to five years.”
Eng-Teck also believes that Asia will continue to offer up top returns for investors over the long haul. “We think that Asia – on an absolute basis in the long-term – can still return between 15-20 per cent,” he says. Almost half of this gain comes from strong economic growth.
For investors wishing to gain exposure to Asia there are a number of ways, although stock picking is not recommended by most analysts, including Aberdeen’s James who considers it very risky. By far the best is through managed funds, such as run by Aberdeen’s Asian Opportunities Fund or Treasury Asia Asset Management’s New Asia Fund.
Another way investors can gain access is through iShares, run by Barclays Global Investors. This is an open-ended Exchange Traded Fund (ETF), traded on the Australian Securities Exchange. It’s almost the same as buying and selling domestic stocks, except it’s possible to get exposure to the entire region, or just focus on one country, such as China.
Being listed on the ASX means that trading is simple, with settlement on the third business day. iShares has a number of different products according to taste, from MSCI Emerging Markets, which looks at a broad spread of companies, to something a little more exotic like the FTSE/Xinhua China 25, which consists of the 25 most liquid and largest of Chinese companies.