Apollo Investment Management 

The all-way case for Asian investment

The biggest risk to Asian markets, in my view, is the US stockmarket bubble. It is possible to agree on the dangers in the US and to be more sanguine about the implications. Some people see no bubble, but only blue sky. The interesting thing is that we can all concur on the relative attractions of Asian markets - an all-way bet, at least in relative terms.

Here I shall quote Christopher Wood of ABN-Amro, whose "Greed & Fear" of 2nd September tackles the immediate concerns of strengthening global growth and rising interest rates with the following pertinent comments:

"Any talk of increased interest rates in the US and Europe only adds to the relative merit of the Asia equity investment story... fears of overheating and renewed monetary tightening in Asia are way too premature... even in those pace-setting regional economies where the recovery is most advanced, such as Korea and Singapore, growth is being driven by rises in productivity that are outpacing inflationary pressures. Thus, unit labour costs are down 6.9% year-on-year in Korea...

"Loan/deposit rations continue to decline throughout the region... the shock of the Asian crisis will have profound consequences for a generation of bankers who have survived... the lack of credit growth is actually quite bullish... it prolongs the benign period where there is free liquidity to go into Asian financial assets such as equities. This should extend the bullish cycle since the overheating will take that much longer to kick in.

"From a free liquidity point of view, Hong Kong looks in the short term the most promising of Asia's major markets, for the obvious reason that the economy has yet to pick up... A further positive for Hong Kong is the increasing desperation in China to get domestic demand going... The problems remain as gargantuan as ever, but the thrust of policy continues to be at least short-term bullish for both Hong Kong and China stocks.

"Asia's liquidity story will remain sweeter for longer than many now realise... there is no reason for any country in the region to engage in pre-emptive monetary tightening. The past deflationary shock has simply been too great."

Those concerned about a collapse of "bubble.com" will be more focussed on the possible consequences of collapsing US demand, and its consequences for Asian exporters - but even some aggressive bears of US equities are relatively sanguine about the consequences for Asia, now that domestic healing is well under way, and that exports to Japan and the rest of the region are growing strongly. Collapsing US equities, they argue, only heighten the attractions to asset allocators of the remaining growth areas.

I'm at the nervous end of the spectrum, and fear that financial quakes in the US could send new tidal waves in our direction. However in practical terms, I am finding absolute value which appears too compelling to leave on the table. With our portfolio of excellent companies currently offering an earnings yield of 13% (well over twice what I can get in the bank), and an after-tax dividend yield of 7% (also more than I get in the bank), plus growth prospects which I believe second-to-few, I am happy to keep a high percentage of my personal assets in Asian equities. If my worst fears were realised, short-term valuation losses might be considerable - but any damage to the strategic business franchises and cash-generating potential of our companies should be much less, and possibly more than compensated by the opportunities which crisis presents.

Claire Barnes, 6 September 1999

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