Feature Articles: Investment - OCBC Wealth Management

Worst may not be over for Asia

28 August 2008

Mr. Hugh Young, Managing Director of Aberdeen Asset Management Asia Limited, reckons that investors hoping for a quick rebound of Asian stock markets may be in for a disappointment.

In fact, he thinks that Asian bourses may fall further after having done exceptionally well in the last six years.

Corporate earnings are under pressure

“The negative headlines about slowing economies, rising inflation and corporate earnings pressures are not likely to go away anytime soon, and they will weigh on Asian bourses” warned Mr. Young.

He said that while earnings have generally held up fairly well so far this year, consensus estimates are likely to be revised downwards in the second half as the magnitude of the sub-prime crisis and economic realities begin to bite. Rising costs will also hurt corporate earnings in Asia.

Aberdeen expects corporate earnings in Asia to decline this year after posting double-digit gains over the last few years.

“The outlook appears bleak and it could be the middle of next year or even longer before we start seeing some light at the end of the tunnel,” cautioned Mr. Young.

“So far, Asian markets have been hurt by inflation fears, but this is likely to be overtaken by growth concerns in the coming months.”

Strong companies could still benefit

Despite the bleak outlook, Mr. Young said that companies with strong balance sheets stand to benefit as they are likely to be less impacted by the credit crunch.

“The current crisis is positive in a perverse sense for the stronger companies in Asia because it will wean out some of the competition from within and outside the region,” said Mr. Young.

“There may not be an immediate earnings impact, but in the long term, the businesses of the stronger companies will grow and they stand to gain market share when the economy turns around.”

More positive about India than China

According to Mr. Young, stock markets in China and India have corrected more sharply than most other bourses in Asia because both markets were over extended in terms of valuations.

Between China and India, he is far more positive on the latter as he feels that Indian companies are more professionally managed and have better corporate governance.

“We are a lot more comfortable that Indian companies are better placed to deal with an economic slowdown and sharply higher inflation than Chinese companies,” said Mr. Young.

“This is why we are overweight on India in our flagship Aberdeen Pacific Equity Fund relative to its benchmark.”

Biggest overweight in Singapore

Among Asian markets, Mr. Young said that the Singapore stock market enjoys the biggest overweight in the Aberdeen Pacific Equity Fund.

This is not because Aberdeen is of the view that the Singapore economy is more immune to a global economic slowdown compared to other Asian economies.

“We like Singapore because we think that the quality of its listed companies is superior to may other Asian companies,” said Mr. Young.

“Also, Singapore is a regional story as companies here are expanding their footprint in Asia.”

Positive on Thailand, Indonesia and Philippines

Other markets which the Aberdeen Pacific Equity Fund is overweight on include Thailand, Indonesia and Philippines although Mr. Young highlighted that the exposure to them is relatively small as it is not easy to find many attractive companies in these markets.

Indifferent to Taiwan and South Korea

Mr. Young said that despite the euphoria about the new government in Taiwan, Aberdeen is indifferent to the Taiwanese bourse as it is hard to find many listed companies in the country that are well-run. Also, many companies on the market are tech stocks that will be hurt by a slowdown in the U.S. economy.

As for South Korea, Mr. Young said that although the market's valuations look inexpensive, listed companies in the country are generally lacking in corporate governance.

Stronger domestic orientation

Given the global economic slowdown, Mr. Young said that Aberdeen is paying greater attention to stocks with a domestic orientation.

“Although these stocks are not completely immune from a global slowdown, they are probably better placed to withstand any external shocks,” said Mr. Young.

High exposure to financials

Despite concerns about the credit crisis, the Aberdeen Pacific Equity Fund's biggest overweight on a sector basis is in financial stocks.

However, Mr. Young said that Aberdeen is very selective about the financial stocks that it invests in.

“The financial institutions in our portfolio have sensible business strategies and conservative accounting practices,” said Mr. Young.

Hence, he is confident that they will not suffer the fate of their Western counterparts that have been badly hurt by the U.S. sub-prime crisis.

Political risk could rise in Asia

Economic risks aside, Mr. Young also warned about heightened political risk in Asia due to inflationary pressures.

“Asia has a sizeable population of poor people who will be hurt by higher food and energy prices,” said Mr. Young.

“There is a risk that this could cause unhappiness among the masses and raise political temperatures in many parts of Asia.”

Conclusion

Despite the economic and political uncertainties, Mr. Young agrees that Asian economies and stock markets are likely to outperform their Western peers in the medium- to long-term.

He says that Aberdeen's conservative investment strategy may not appeal to investors in a bull market, but when markets hit a rough patch like now, Aberdeen's funds tend to outperform and stand out from the pack.

“Ultimately our strategy of buying well-managed companies for a reasonable price will pay off,” said Mr. Young.

“Our investment strategy may seem tortoise-like, but eventually we catch up with the hare and may even overtake it in the race.”

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