Asian Consumers Are Spending
Whenever the international outlook is perilous, skittish investors instinctively run screaming from emerging-market equities. But when it comes to Asia, heading for the exits may well mean missing out on some lucrative opportunities. Whether you are betting on a global economic recovery or foresee a prolonged downturn, insists Spencer White, head of Asian equity strategy at Merrill Lynch Asia, "Asia has a chance to outperform."
For the first time since the Asian financial crisis five years ago, many countries in the region are squarely on the path of sustained growth. True, export-dependent Taiwan, Singapore, and Japan are still hostage to global conditions. But a boom in consumer demand is fueling strong recoveries in South Korea, Thailand, and Indonesia. Asian consumers are abandoning their parsimonious ways as memories of the crisis fade. These days, they're snapping up automobiles, new homes, and the latest electronic gadgetry. Jim Walker, Hong Kong-based chief economist for CLSA Emerging Markets, projects that South Korea will grow 7.3% this year and Thailand 4.4%. Both are poised to do even better next year. Meanwhile, irrepressible China continues to burble away at 6% to 7% growth.
What has changed? In the past, U.S. investors bought Asian equities as a way to leverage global growth. But in the past 12 months, domestic consumption has fueled local economies. To capitalize on this consumer theme, Morgan Stanley economist Andy Xie suggests buying shares in banks with strong retail operations. He's particularly keen on South Korea's largest bank, Kookmin, whose iconoclastic president, Kim Jung Tae, has embraced Western-style management, trimmed the fat, and expanded into the highly profitable home-mortgage, personal-finance, and credit-card businesses. Meanwhile, Jean-François Canton, a Paris-based fund manager at Comgest Asia, has been loading up on shares of department-store chain Shinsegai to take advantage of the consumer boom.
There's another compelling reason to invest in the region: It's just plain cheap, says Ajay Kapur, Asian equities strategist at Salomon Smith Barney. Kapur figures that with an average price-to-book multiple of just 1.5, Asian equities trade at a 40% discount to U.S. stocks and offer far better prospects for growth. Japanese electronics giant NEC looks tempting, for example, despite its debt problems and excess capacity. It's now trading at 20-year lows compared with the Nikkei 225 index.
Asian telecommunications companies, too, have shown resilience in the face of the international crisis. Markus Rosgen, ING's chief strategist for Asia-Pacific, says the region's telecoms are trading at price-earnings ratios of just 12.9 for 2002 and 11.5 next year. "The beauty of Asian telecoms is [that] they have net debt-to-equity ratios of just 50%," he says. "That's something European telecoms could only dream of." He's bullish on prospects for South Korea's SK Telecom, which commands 53% of the mobile-phone market back home. And SK is now expanding to provide wireless Internet services to China and the rest of Asia.
Ironically, another downturn in the U.S. could benefit Asian exporters. That's because the cost squeeze at home for U.S. manufacturers is hastening the outsourcing of their production to workshops in Asia. Hence, even during worldwide trade slumps, Asia's share of the pie should keep growing. "Life isn't over for the export sector," says Robert Conlon, chief investment officer at Investec Asset Management. Taiwanese personal-computer component maker Hon Hai Precision Industry is one beneficiary of expanded U.S. outsourcing, which has helped fuel growth.
Of course, there are no sure things. Most Asian bourses racked up eye-popping gains earlier this year only to see much of those gains slip away in early summer. It was a reminder that Asian markets can get only so far under their own steam. CLSA's Walker is enthusiastic about the potential for Asia outside of Japan to become an engine of global growth. But, he adds, in the event of a double-dip U.S. recession, all bets would be off. "Things could very quickly become derailed," he concedes. If that happens, even the relative safety of Asia won't offer investors much of a refuge.
By Frederik Balfour