As Asia Slows Down, Investors May Still Want to Dive In

Stock funds that specialize in Asia, excluding Japan, were up 2.3 percent in the period, according to Morningstar’s database, compared with again of 4.8 percent for Europe funds and a 10.6 percent for funds concentrating on American stocks.

Investment advisers attribute the performance to both a concern that developments around the world, and in Asia itself, will undermine the strong economic progress for which the region is known, and to a general sense of unease and desire to limit risk. But the weakness is likely to be short-lived, in their view, and they encourage investors to consider using it to buy good companies at reasonable prices.

“Expectations of growth have slowed, and that has really caused valuations to decrease,” said Nicholas Kaiser, chief investment officer at Saturna Capital. “We’ve seen the slowdown, but we don’t think it’s a major problem. It’s a buying opportunity.”

The deceleration in some of the largest Asian economies is no mere accident, but rather has been engineered by the authorities to try to curb inflation. Samuel Stewart Jr., manager of the Wasatch World Innovators fund, pointed out that the region was not hit as hard as other parts of the world during the 2008 recession. When global growth took off again, Asia took off especially quickly — maybe too quickly.

Asian economies “have done so well that governments are starting to tap on the brakes,” he said. “India and China are trying to slow their economies down, and it’s working.”

That is not the only source of potentially slower growth that is unsettling investors. Another is the same set of events, especially the latest flare-ups of European financial woes, that have depressed other markets.

“People are starting to worry about a recession in Europe,” Mr. Stewart said. “That won’t do any good for any country trying to export there.”

Worry, more than any tangible economic impact, may be what is depressing Asian markets. The region, which contains mainly emerging economies, is susceptible to strong capital inflows and outflows based on greed and fear — and fear has appeared ascendant of late.

“Short term, investors are looking at Asia in a classic risk-on, risk-off kind of way,” said Robert Horrocks, chief investment officer at Matthews International Capital Management.

For patient investors, Mr. Horrocks sees a lot to recommend about Asia — particularly the youth and aspirations of many of its people. They create a demand for products and services and provide a work force with the vitality to provide them.

“Look at the demographics,” he said. “There are younger countries like Indonesia, the Philippines, Vietnam and India. People want to buy their first house and their first car, and they want to have their first holiday abroad.”

As for “businesses that we would be happy owning for a decade,” he looks at industries that tend to cater to Asian consumers and have a small number of strong competitors — areas like telecommunications, consumer staples and fast food. He prefers them to the exporters of cheap goods (“the guys making garden furniture for Walmart”) that fit a stereotype of corporate Asia.

Mr. Kaiser offers a similar assessment of the region and its people.

“Living standards have a long way to rise, and they’re hungry entrepreneurs,” he said. “These are things we don’t find in much of the rest of the world, things we’re attracted to. We’re increasing exposure because of the long-term growth outlook.”

Mr. Kaiser finds countries in the Association of Southeast Asian Nations, including Malaysia, Indonesia and Thailand, especially appealing for their “young and cheap labor, raw materials, rising populations and the chance for very big increases” in economic output that can drive much growth.

He is also a fan of the consumer theme and favors companies that could benefit from the quest for a better quality of life. An example is KPJ Healthcare, a hospital chain in Malaysia. A more back-to-basics selection is PT Semen Gresik, a large Indonesian cement company.

MR. STEWART and his Wasatch colleagues favor investing in Indonesian growth through Jasa Marga, a toll road operator, and Ace Hardware Indonesia, a familiar name in what for many is an unfamiliar place. He also likes financial services stocks, including Security Bank in the Philippines and PT Bank Tabungan Pensiunan Nasional in Indonesia.

For all of Asia’s promise, some fund managers are reluctant to buy now. Edward Chancellor, a member of the asset allocation team at GMO, acknowledged that “valuations are not trying, to say the least,” but he expressed misgivings about economic and political conditions in China, the region’s dominant economy. “I would argue that China has had a credit bubble the last three or four years,” Mr. Chancellor said, noting that debt levels, as a proportion of economic growth, have risen substantially.

He also highlighted the reputation of the Chinese leadership for compelling banks and other businesses, state-owned and private alike, to engage in activities that meet some grander social purpose than the benefit of shareholders.

“I think China’s problems will continue to be a source of concern,” he warned. “It’s quite questionable whether China can be an engine of global growth going forward, and that has large repercussions for the region.”

Mr. Horrocks accepts that “banks are not efficient allocators of capital in China,” but he glimpses a more widespread overhaul in the way business is done. “There has been very robust productivity growth and innovation,” he said.

He advises concentrating on such developments rather than short-term impediments to economic progress and healthy investment returns.

“Asia has good, solid fundamentals and well-developed capital markets,” he said. “Over periods of six to 12 months, it’s susceptible to risk-on, risk-off movements. The key is to focus on long-term factors. Look after those things and the growth will look after itself.”

Article source: http://www.nytimes.com/2012/01/08/business/mutfund/as-asia-slows-down-investors-may-still-want-to-dive-in.html?partner=rss&emc=rss