Schroders - Marktausblick Asien

Asian markets have outperformed since late 2001, what is the outlook for 2003? Markets across the Pacific region are very much responsive to the economic fortunes of the US, and expectations that a US led global economic recovery will be slower than anticipated have had a negative impact across this growth sensitive region. However, with many of these markets undervalued compared to their western counterparts, there are a number of positives that are coming out of the region.

Largely export focused, they stand to benefit as western markets in particular start to buy up export goods, building their inventories as demand increases, having let them run down during the slowing economic cycle. History shows that following periods of economic slow down, growth sensitive markets profit most, and earliest, during the fledgling stages of economic recovery.

If we add to this the fact that many Pacific region markets themselves have also cut costs and lowered inventory levels in response to the current backdrop, then we should find that as economic growth picks up, this will feed through to increased company profits.

The current pressures on export demand, however, should not obscure Asia's healthy financial position. The post-1998 restructuring has broadly worked. Each country in the region has a current account surplus, cashflow is strong, allowing debt to be repaid and profitability is back to the levels of the mid-1990s. There has also been an improvement in the markets' perception of Asian earnings relative to those in the West. At a time when US accounting is under scrutiny, there is a virtue in a corporate sector that has already been through a major shakeout.

Which specific countries in the region are you expecting to stand out next year and why?

Although there might be a temptation to see the region as one, with a healthy domestic position waiting for the external environment to get better, in practice the region is too diverse for such kind of simplification. Korea and China are firing on most cylinders; Hong Kong is coming to terms with deflation, with consumer prices having now fallen for three years; Taiwan is somewhere in-between; and the small ASEAN markets remain off most global investors' maps. There is also the familiar disconnect between economic strength and stockmarket opportunity: the growth in export market share is almost all in China; Hong Kong's deflation is at its worst in the property sector, which has a big impact on local sentiment; and any recovery in the financial stability of the small ASEAN countries is hard to exploit when share turnover is so low (only ten companies in Thailand, Indonesia and the Philippines have a free float over $2bn). Although these country elements are important, in our investment style stock selection is driving performance. We will continue to invest in a combination of companies with strong local businesses as well as a concentrated list of exporting companies in which we have confidence.

How much will terrorism in the region affect the economies of countries like Indonesia?

Bali accounts for some 40-50% of total tourism earnings in Indonesia. It is therefor almost a certainty that tourist numbers to Indonesia as a whole will be seriously affected. Tourism earnings forecasts were already roughly 10-15% down on last year. In this context, a halving of tourism revenues could be expected, which is a balance of payment loss of at least $2 bn. This obviously will have a significant influence on Indonesia's economy and with potential further flight of capital will put pressure on the overall balance of payment surplus.

What will improve sentiment following the Bali attacks?

Let's not forget Asia is having a good 2002. Although it seems fair to say that political risks within emerging markets are increasing, which will have an effect on equity premiums, the region has grown 4% in real terms, at a time of zero growth in most of the OECD. The Bali bombing aside there has been no major political or corporate drama, again in contrast with the OECD; and the region's market share continues to grow. We feel very confident Asia will continue to put in strong numbers.

How Megawati will handle the Bali crisis will be one specific element the markest will watch. However as indicated above there are many more elements which will influence investor sentiment. On top of that, many Pacific region markets remain undervalued, and on this basis, appear attractive both historically and compared to western markets.