asian investment outlook - february 2007
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Baring Asset Management (Asia) Limited19th Floor, Edinburgh Tower
15 Queen’s Road Central, Hong KongTel: (852) 2841 1411Fax: (852) 2868 4110
www.barings.com
February 2007
THE ASIA PACIFIC FUND, INC.
Asian Investment Outlook
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Asia’s long-term outlook
Strong economic growth, boosted by rising domestic consumption
Improving corporate returns
Undervalued currencies, fair value markets
Secular re-rating expected to continue
Asia: it’s harvest time !
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Source: Baring Asset Management (1/2007)
Have Asian markets returned to the Bull Super-cycle?
Double digit annual returns, decreasing volatility: the best of both worlds !
Year Yearly Returns * Volatility of returns
(in % terms)
2003 +45.0 16.3
2004 +17.6 14.4
2005 +21.8 15.4
2006 +32.2 12.5
* Note : MSCI AC Far East Free ex Japan index returns (in %, USD, gross terms)
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Out-performance of AsiaSecular re-rating continued in 2006
Asia’s out-performance is expected to continue
Asia outperformed over the last five years
Source : HSBC (12/2006)
(80)
(60)
(40)
(20)
0
20
40
601
98
9
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
MSCI Asia ex-Japan return differential over MSCI WorldMSCI Asia ex-Japan return differential over MSCI USA
5
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Asia-5* : From Crisis to Solid Recovery
Stronger discipline on CAPEX spending producing a healthier current account balance
Source: Credit Suisse (11/2006)
Asia-5 Current Account, $ bn
-60
-40
-20
0
20
40
60
80
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
F
20
07
F
-6
-4
-2
0
2
4
6
8
10
12
Asia-5 Current account ($ bn)
(% of GDP, RHS)
Asia-5 Fixed Investment % of GDP
* Asia 5 : Korea, Thailand, Philippines, Indonesia, Malaysia
24
26
28
30
32
34
36
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
F
20
07
F
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The global importance of Asia
* Excludes Japan
Source: Goldman Sachs Dec 06, based on end
2005 data
% Share of US Euroland Asia*
World GDP 22 16 31
Official Reserves 1 8 50
Stockmarket Capitalisation 40 18 10
Gap between Asian market capitalisation and strong economics to close in coming years?
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Asia: De-coupling from the US?
Source: Morgan Stanley (11/2006)
US Share of Asian Exports: Lower Than Past Cycles
The correlation between Asia & US Industrial Production growth trends
has declined
Export Share: Asia Pac ex-Japan, India & Australia
20.0% 22.1% 22.4% 21.6% 20.7% 20.4% 18.9% 18.3% 17.8%
38.6% 34.7% 35.2% 36.5% 36.2% 38.5% 39.3% 40.1% 39.9%
13.3% 11.8% 12.8% 13.7% 13.9% 12.4% 11.9% 11.3% 10.5%
14.6% 16.5% 16.2% 15.2% 15.1% 14.4% 14.9% 15.6% 16.0%
13.6% 14.9% 13.3% 12.9% 14.1% 14.3% 15.0% 14.7% 15.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1997 1998 1999 2000 2001 2002 2003 2004 2005
US Asia Pac ex Japan Japan EU Others
-10%
-5%
0%
5%
10%
15%
1980 1983 1986 1989 1992 1995 1998 2001 2004-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
US AXJ
High Correlation Low Correlation
Not completely, but increasingly so
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Asia: De-coupling from the US?
China’s and India’s strong and sustainable growth have increasingly provided an economic buffer to Asia
After seven years of belt tightening - since the 97-98 crisis - Asia has started to invest and consume
Asia’s wealth has been rising thanks to strong property, equity and currency markets
This renewed confidence will likely help the domestic economy of Asian countries to lessen their dependence on exports to the US
A decade of sustainable growth appears to have commenced
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China: Spending on big-ticket items, but ……
Property Prices in line with Income
Rising property price
Sedan Sales in China
Strong growth in Sedan sales
Source: Citibank (12/2006)Source: BNP Paribas Peregrine (12/2006)
80
130
180
230
280
330
1992 1994 1996 1998 2000 2002 2004 9M06
1992 base 100
Housing price
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
94 95 96 97 98 99 00 01 02 03 04 05 YTDNov 06
30.0%18.8% 24.0%
6.0%12.3%7.6%
16.7%56.4%
71.5%
19.3%
21.5%
36.0%
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……… China’s savings ratio continued to rise !
Savings/GDP
Source: CEIC, CLSA (8/2006)
China’s income growth appears to grow at a faster rate than consumption growth
(%)
20
25
30
35
40
45
50
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
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China has become a major lender (and investor),while the US remains the world’s largest borrower
Japan14.4%
Saudi Arabia7.9%
Other countries22.3%
Russia7.2%Switzerland
4.4%
Norway4.3%
Singapore2.9%
Netherlands3.5%
Canada2.3%
Venezuela2.2%
Algeria1.9%
Kuwait2.8%
China13.9%
Germany10.0%
Source: UBS (11/2006)
Major capital exporters and importers (% of total)
Other countries
13.1%
Spain6.9%
United Kingdom4.0%
Australia3.5%
France2.8%
Italy2.4%
Turkey1.9%
United States65.4%
Negative implications for the US dollar and positive implications for Asian currencies … and gold?
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Barings’ Global forecasts for 2007
US economy expected to grow more strongly in H2 ‘07
Europe expected to remain relatively buoyant, but Japan more sluggish
G7 core inflation likely to remain around 2-2.5%
US monetary policy likely to remain on hold in H1, but potential risk of renewed tightening in H2
Oil prices likely to trade between $US 50-80 /bbl
Still a relatively benign global backdrop, but direction of US monetary policy and oil prices is key
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Barings’ Asia Pacific forecasts for 2007
China expected to continue to grow solidly (9–10%) and drive the region
Other Asian economies likely to grow at long-term trend rates
Asian central banks’ policy direction expected to be mixed (Indonesia and Thailand to cut, China and India to raise, while others to maintain a status quo)
Asia Pacific currencies likely to continue to strengthen modestly vs the USD
Still a favourable regional economic backdrop
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Source: Goldman Sachs (12/2006)
* Based on H-Share Index
Asian Market Valuation: At fair value
Korea and Thailand are relatively cheap, while India and China are relatively expensive
Country PE PBV ROE EPS Growth
2006 2007 2006 2007 2006 2007 2006 2007
China 16.9 15.1 2.8 2.4 18.4% 17.3% 16.0% 12.0%
India 20.6 17.7 4.8 3.8 27.4% 25.4% 21.0% 16.2%
Indonesia 16.4 13.0 3.2 2.9 21.5% 23.1% 23.0% 24.6%
Malaysia 16.6 14.4 2.0 1.9 13.3% 13.6% 20.0% 14.2%
Philippines 15.3 13.4 2.4 2.2 17.0% 16.8% 10.9% 14.6%
South Korea 12.3 10.5 1.5 1.4 12.7% 13.9% -8.4% 16.8%
Taiwan 15.5 12.8 2.1 1.9 14.4% 15.9% 14.4% 20.5%
Thailand 8.6 8.4 1.6 1.5 20.7% 18.6% 1.2% 2.5%
EM Asia 15.0 12.9 2.2 2.0 15.0% 16.1% 10.1% 17.7%
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Chinese equities: ‘Bubble’ in the making ?
Similar to Japan (and Korea/Taiwan) in the 80s, one notes: China’s ‘deflationary boom’ super-cycle, a strengthening Renminbi, massive liquidity inflows, re-rating of cheap equity market
China is undoubtedly THE growth story of this decade
‘Non-believers’ in China appear to be gradually ‘converted’
Each decade sees a bubble ….. so is this ……
….. China’s turn ?
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Chinese equities’ rally: Heading towards a ‘bubble’ ?
As with Japan, Korea and Taiwan in the 80s …. will a Chinese market ‘bubble’ materialise?
Source: Macquarie Bank (11/2006)
% change since Jan 02 for China; Jan 82 for elsewhere
-500
0
500
1,000
1,500
2,000
2,500
Mth 1 M13 M25 M37 M49 M61 M73 M85 M97 M109 M121
China Korea
Taiwan Japan
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Chinese equities’ valuation: Still reasonably low
Compared to Japan, Korea and Taiwan in the 80s, Chinese equities are nowhere near
‘bubble’ valuations yet
Source: Macquarie Bank (11/2006)
0
10
20
30
40
50
60
70
80
Mth 1 M13 M25 M37 M49 M61 M73 M85 M97 M109 M121
China
Japan
Taiwan
PE ratios since Jan 02 for China; Jan 82 for elsewhere
0
1
2
3
4
5
6
Mth 1 M13 M25 M37 M49 M61 M73 M85 M97 M109 M121
China
Japan
PB ratios since Jan 02 for China, Jan 82 for Japan
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Global risk appetite : neutral
Still in neutral zone, as economies and markets appear to be at equilibrium levels
Source: Crdit Suisse (1/2007)
-6
-4
-2
0
2
4
6
8
10
Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05
Euphoria
Panic
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What are the potential RISKS in 2007 ?
China’s inflation rising to 5-6% (due to high food price inflation ?), forcing PBOC to tighten monetary policy more aggressively
Serious trade embargo by US on China
Severe US monetary tightening, leading to a recession
Re-escalating tensions in the Middle East, leading to much higher oil prices
Significant loss of risk appetite for equities
Risks are real, but deemed as low probability events
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Asian Markets’ Outlook in 2007
Consolidation in H1 after a strong Q4 ‘06
Medium-term prospects remain favourable, with China expected to remain the centre of attraction
Korea and Taiwan could surprise on the upside in H2 ’07
Asian markets are expected to post another year of positive returns in 2007
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Asia – Major Investment Themes
China consumption and the rise of the middle class
Regional asset reflation – Singapore, Indonesia, Taiwan, Malaysia
Petro-dollar recycling “Middle East construction boom” – shipbuilding, oil services and engineering
Re-construction of Asia – engineering, construction, building materials, capital goods
Improved supply side discipline of “cyclical” sectors – energy, materials, technology
Consumption, Asset Reflationand Re-construction
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Investment Professionals
HENRY CHAN, CFA, CPA Head of Asian Investment TeamHong KongInvestment Experience: 12 Years
Henry is responsible for the Asian investment policy and portfolio construction. He became the Head of the Asian Investment Team in 2006. Henry joined Baring Asset Management in 2004 and assumed the lead role in driving our Asian institutional mandates and flagship retail products, namely, Baring Asia Growth and Baring Eastern Trust. At the specialist level, Henry is the co-manager the Baring China Absolute Return Fund and Baring Korea Trust. Henry has extensive experience in the management of both Asian regional and specialist mandates. Prior to joining Baring Asset Management he worked at INVESCO (formerly LGT) where he handled a number of Pacific Basin (including Japan) and Asia ex Japan portfolios. His specialist experience covered a number of markets including Taiwan, Hong Kong, China, Korea and Japan. He was also the lead fund manager of INVESCO Asia NET Fund, INVESCO GT Taiwan Fund and a number of Greater China portfolios. Henry received his Bachelor Degree from the London School of Economics and Political Science in 1992. He was awarded the CPA designation in 1994 and became a CFA in 1997. Henry speaks fluent English, Cantonese and Mandarin. .
Last updated: 29th January 2007
KHIEM DOChair of Asia Multi Asset Group Member of Targeted Solutions Portfolio Construction GroupHong KongInvestment Experience: 30 years
Khiem is responsible for the management of a number of specific Asian portfolios, and all Multi-Asset portfolios for clients located in Asia. He was appointed to become a member of the Strategic Policy Group, the company’s global macro research and asset allocation team in 2006. Khiem was the Head of the Asia Pacific Specialist Investment Team from 1997 through 2006. He has been a co-manager of the Baring China Absolute Return (long-short hedge fund) since July 2004. Khiem joined Baring Asset Management in 1996 from Citicorp Global Asset Management in Sydney, where he was the Australian Chief Investment Officer, the chair of the Australian Asset Allocation Committee, and a member of the CGAM International Asset Allocation Committee. Khiem’s prior experience includes seven years at Bankers Trust Australia and seven years at Equitilink Australia Ltd. Khiem received his B.A. in Economics (Hons.) from Macquarie University (Australia). He was designated an Associate Member of the Securities Institute of Australia (the Australian CFA equivalent) in 1979. Khiem is fluent in English, Vietnamese, and French.
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Important Information
This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate serving as the Asia Pacific Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.
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Complied (Boston): January 29, 2007