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Managers divided on Asian companies’ ability to ride out downturn, says AIC

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Asia has not been immune to the economic turbulence over the last year, with the average Asia Pacific (excluding Japan) investment company down 34 per cent and the Asia Pacific (includi

Asia has not been immune to the economic turbulence over the last year, with the average Asia Pacific (excluding Japan) investment company down 34 per cent and the Asia Pacific (including Japan) sector down 36 per cent, according to the Association of Investment Companies.

However, the AIC says performance in Asia seems to be a tale of two halves, since over the longer-term performance has been strong in the Asia Pacific (ex Japan) sector.

The AIC has looked at the prospects for investment companies in Asia by collating fund managers’ views on the outlook for the region.

All managers agree that while the western world is paying the price for years of over-spending, Asian countries seem to be in a stronger position as their populations have much higher levels of personal savings and their companies have a lack of corporate debt, putting them in a good position to ride out this downturn.

Yet managers have marked the beginning of the Year of the Ox with divided views on China. While Mike Kerley, manager of the Henderson Far East Income fund, tips China as the key growth driver over the next ten to 20 years, Aberdeen Asset Managers managing director Hugh Young has mixed feelings, with an unstable earnings outlook tempered by the potential for sustainable, consumer led growth.

There are also some hopeful views on the Japanese market.

Young, the Singapore-based lead manager of various Aberdeen Asian equity investment trusts, says: "No one should be under any illusion about how savage the financial crisis and how inter-linked the global economy now is. However, while the West faces up to the consequences of living beyond its means, the strength of Asia will become more apparent.

‘Exports may be down sharply, but high savings rates, healthy government balances and relative lack of corporate debt will mean the region will be able to recover relatively quickly. Company valuations are now compelling for those long-term investors able to weather continued short-term price volatility."

Kerley adds: ‘It will become clear in the next year or two that as the UK and US go through a de-leveraging process that Asia does not have the same reliance on debt or on over-inflated asset prices. Asian savings have been fuelling the consumer boom in developed markets for the last ten years and now with interest rates falling everything is in place for Asians to mobilise these savings into higher yielding vehicles. This should be favourable for overall consumption but especially property prices and higher yielding equities.’

If Chinese horoscopes are anything to go by, the year of the Ox is meant to be one of prosperity through fortitude and hard work which could be good news if reflected in its economy.

Kerley says: ‘We all know the top down story in China is strong and that China will be the growth driver over the next ten to 20 years globally – the question is what you pay for that growth?

‘I am fairly confident that China is going to be able to post at least seven per cent GDP growth over the next year and when you consider what’s happening in the rest of the world this will make it stand out. China does have a far more diverse export base than it used to and if you are a global manufacturer looking to cut costs in a downturn, you do not cut your lowest cost producer.’

Aberdeen’s Young says that looking ahead he expects worsening economic data to prolong volatility in equity markets in China and Hong Kong, with the earnings outlook now very unstable.

‘Underlying economic conditions have become more complex too; China can no longer depend on cheap exports for growth as it had in the past because external demand has collapsed, while Hong Kong is likely to remain weak in the near term.

‘But there are reasons to remain upbeat: a slowdown which forces China to address the structural imbalances in its economy and pushes it to make the transition to consumer-led growth would bring about more sustainable long-term growth,’ Young adds.

The Japanese economy has had a somewhat turbulent ride over the years and its current performance does not match up to its Asian counterparts. However, it is not all doom and gloom and there is some hope for investors in Japan with good buying opportunities beginning to appear.

Matthew Brett, Baillie Gifford Japan desk, says: ‘The tension in the Japanese market is between a poor economic outlook and attractive valuations. As with other economies, Japanese economic statistics have deteriorated rapidly in recent months and overall economic visibility remains poor.

‘However, the market is also very lowly rated with the majority of stocks trading below book value. We do not attempt to forecast the direction of markets, but we are seeing a good number of quality businesses available at what we consider to be very attractive valuations. Stock picking based on sound fundamental analysis remains key in choosing what will hopefully prove to be the best performing stocks over the longer term.’

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