Which Are The Cheapest Markets In Asia?
Our research desk has the answer.
by Mah Ching Cheng
We often raise the importance of looking at fundamental factors such as earnings and valuations before buying unit trusts. We do this for an important reason. There are many short-term factors in the market that might influence the decision of investors to buy or sell funds. These include inflationary fears, oil price hikes and fears of terrorist attacks. Even though fundamentals underlying some of these markets remain strong, investors read such news and turn panicky. But when everyone else is panicking yet fundamentals remain sound, that is actually the best time to enter the market. The three red circles below highlight good entry points to the Asian market. For example, the circle in the middle illustrates the period when market sentiment was poor as investors were concerned about the effects of severe acute respiratory syndrome (SARS) that affected most of Asia. Investors who surmised that markets were down but fundamental factors such as earnings and valuations remained strong, would have benefited if they had bought into markets at that point. Chart 1 In recent weeks, some of these factors that caused short-term volatility resurfaced. A slew of news on the hike in oil prices, inflationary pressures leading to faster interest rates hikes and slower demand for consumer electronics aroused worries from investors again. Despite these worries, there are opportunities to invest in some markets that are attractively valued and have sound fundamentals. In this article, we will compare the valuations of various Asian markets and look at some of the more attractively valued ones. Cheapest Regional Market If we compare valuations on a regional basis, Asia excluding Japan appears to be the most attractively valued region. Estimated price earnings ratios or valuation for this region are at 14X, 12.8X and 11.2X 2004, 2005 and 2006 earnings respectively. Estimated earnings growth for the region for 2006 is also the highest among the four regional markets we are looking at. Chart 2 shows the estimated price earnings ratio of the four regions, which again shows that Asia is the most attractively valued regional market. Besides valuations and earnings, there are also some positive economic factors that make Asian markets look attractive. In Asia, the important drivers of economy include exports and domestic consumption. For most of the Asian countries, exports are still growing at double-digit rates. There are fears that some Asian currencies such as the Korean Won, Thai Baht and Singapore dollar are appreciating vis-?-vis the USD, thus causing Asian exports to become less competitive. However labour, production and raw material costs in Asia, are the lowest among the four regions. Unless the currencies appreciate substantially on a relative basis, it is still more attractive to produce and export goods from Asia. Besides exports, indicators of domestic demand such as retail sales remain strong in Asian nations. Consumer sentiment will tend to pick up when the economy is enjoying buoyant economic growth and there are lower unemployment rates. In addition, China and India remain as two important drivers in the region. Economic growth in Asia ex-Japan will be around 6.2% for 2005. From table 2, we observe that Asia ex-Japan has the highest estimated economic growth amongst the other regions. Table 2: Strong Economic Growth Which Are The Cheapest Asian Markets? What are the cheapest markets within the Asian region? From the table excerpted from our bi-weekly summaries (click here to see the latest weekly summary), we can see that out of the Asian markets we cover, Korea, Thailand and China have the most attractive valuations. Let us take a closer look at the three markets in Asia with the lowest valuations. In 2004, the South Korean government took several measures to improve sentiment. In order to spur consumer spending, the government lowered its benchmark interest rate by 0.25% to 3.25% on November 2004, offered companies a 10% break on investment in plant and equipment in 2005. After these measures were taken, in the first few months of 2005, business and consumer confidence improved. In the January 2005 consumer confidence survey, of the five measures of confidence, attitudes towards living standards, overall spending and spending on goods and entertainment improved. However, the impact of further currency appreciation on exports, as well as a potential slowdown in the technology sector, continue to concern investors. However, we find that these two concerns might be overrated. The appreciation of the Korean won would affect exports only if the currency appreciates significantly more than other competing markets such as Japan and Taiwan. For the second concern, we think that there might be over pessimism over the slowdown in the demand for consumer electronics. In fact, if demand for consumer electronic products such as LCD screens, MP3 players and DVD recorders picks up, economies such as Korea would likely be one of the first to benefit. The second cheapest market in terms of valuations would be the Thailand market represented by the SET Index. Exports and industrial production for Thailand improved in the past two years and is set to grow further in 2005. Industrial production tends to be a leading indicator of export growth and is improving at a steady pace if we look at the figures on a 3-month average basis. Thailand's economy grew 6.1% in 2004, in line with general expectations. National Economic & Social Development board forecasts growth for 2005 to range from 5.25% to 6.25%. There is a series of plans to build up the infrastructure in Thailand. One of which would be the THB 2.3 trillion to be invested in mega projects over the next five years. These "mega projects" include building of subways, toll roads, low-cost housing, ports and airports. It is likely that infrastructure building would potentially benefit sectors such as construction, building and the property sector. The third cheapest market in Asia is China. In our January/March 2005 issue of the Fundsupermart magazine, we stated China as our favourite market in 2005. We like China because many indicators are pointing to continued growth in China, such as exports growth and retail sales. So far, tightening measures implemented in 2004 have been effective in curbing growth in fixed asset investments and loan growth. Thus, worries on the potential of a 'hard-landing' have receded. However, there are still concerns on overheating in selected sectors, especially the property sector in the more developed urban areas of China such as Shanghai and Beijing. Recently, the government took on a targeted effort to discourage property speculation in Shanghai by imposing a 5.6% tax on property owners who sell within the first year of ownership. The estimated PER is now about 12 times for 2005 and is in the lower range of valuations within the past two years. We think that fears of overheating have subsided and more measures are taken up by the government to selectively curb certain sectors in China. Thus, we are positive on China in 2005. Conclusion Within the regional markets that we cover, Asian markets currently have the most attractive valuations and strongest earnings growth. Fundamentals in Asian markets still seem generally sound despite the fears of higher inflation rates and higher oil prices. In addition, export growth and domestic spending will continue to be the two main drivers of overall Asian economic growth. In fact, ADB estimates that the economic growth of Asia excluding Japan will reach 6.2% in 2005. That is healthy growth. We are optimistic that Asia markets will continue to rally in 2005. Our recommended Asia excluding Japan funds includes Aberdeen Pacific Equity, DBS Shenton Asia Pacific and Schroder Asian Growth Fund. For investors interested in single country investments, Korea, Thailand and China are currently some of the most attractively valued markets. Investors can consider: for Korea - Franklin Templeton F-Korea and OCBC Korea, for Thailand - Aberdeen Thailand and for China, Aberdeen China Opportunities and HSBC Chinese Growth. Single country Asia investments are generally more volatile than regional investments such as Asia, thus we recommend that investors consider Asian single country funds as a part of a supplementary portfolio (which is a smaller group of funds within your portfolio that is meant for higher risk funds such single country funds or sector-related funds). Mah Ching Cheng (Analyst, Investment Representative) is part of the Research and Editorial team at Fundsupermart, a division of iFAST Financial Pte Ltd. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any fund. No investment decision should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Past performance and any forecast is not necessarily indicative of the future or likely performance of the fund. The value of units and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer
MARKETS IN ASIA
Source: Fundsupermart compilations, Bloomberg
Source: Asian Development Bank, European Central Bank, Bloomberg Survey and Japan Cabinet Office
*Fiscal year ending March 2006 