January 20, 2022

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

6 Central Banks Act to Buy Time in Europe Crisis

In a sign that the fallout increasingly is global, the Chinese central bank, which has sought to slow the pace of domestic growth over the last year, also moved unexpectedly but independently Wednesday to encourage new lending by allowing banks to reduce their reserves.

In Europe and the United States, where the announcement broke well ahead of stock market openings, the prospect of more cheap money to ease banks’ operations sent stock indexes soaring. A broad index of German stocks, the DAX, jumped almost 5 percent Wednesday, while the broad measure of American stocks, the Standard Poor’s 500-stock index, climbed more than 4 percent. Short-term borrowing costs also declined modestly for some European governments and banks.

But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation.

“The European sovereign debt problem will not be solved only with liquidity,” the governor of Japan’s central bank, Masaaki Shirakawa, told reporters in Tokyo. He said that he “strongly” expected Europe to “push through economic and fiscal reform.”

European leaders, increasingly concerned by a deteriorating financial picture, said Wednesday they were forming a plan to convince markets that the debts of nations like Italy and Greece were not overwhelmingly large and to set new rules to constrain borrowing by euro zone members. They pointed to a scheduled meeting in Brussels on December 8-9 as a looming deadline for those efforts.

“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” Olli Rehn, European commissioner for economic and monetary affairs, said Wednesday after a meeting of European finance ministers.

Politicians in Europe and the United States have seemed paralyzed for more than two years by the twin challenges of reducing debt and increasing economic growth. That has left central bankers to act alone. A JPMorgan Chase analysis of the monetary policy of major central banks found that the tendency was more toward reducing borrowing costs than at any time since the fall of 2009.

The Fed, which announced new measures to stimulate the domestic economy in August and again in September, said the move announced Wednesday was designed to ease a particular strain on the global economy: It has become increasingly difficult for foreign banks to borrow dollars, which they need to finance existing obligations and to make new loans because a significant portion of global financial transactions occur in dollars.

The Fed and the other central banks announced that they would reduce roughly by half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed. The banks also said that loans would be available until February 2013, extending a previous cutoff of August 2012.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” said a statement released by the Fed, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

The dollar crunch is most pronounced in Europe, because American money market funds reduced their investments in continental banks by 42 percent between the end of May and the end of October, according to Fitch Ratings. The retreat from France was particularly severe, with money funds cutting their exposure by more than two-thirds.

The lending program expansion is mostly a protective measure — by easing access to dollars now, the banks can guard against a full-fledged liquidity crisis later. So far, the Fed has just $2.4 billion in outstanding currency loans, including $522 million lent last week to the European Central Bank. By contrast, at the height of the financial crisis in November 2008, the Fed had outstanding dollar swaps with foreign banks of almost $572 billion.

The European Central Bank will next offer dollar loans to banks on Wednesday. “This is something that is very welcome,” Silvio Peruzzo, an economist at the Royal Bank of Scotland in London, wrote in an analysis. “This will not solve all deep-based funding problems which are due to the sovereign debt crisis. But there is an issue with dollar liquidity, especially with foreign currency, and this measure addresses that.”

Stephen Castle contributed reporting from Brussels, Jack Ewing from Warsaw and Hiroko Tabuchi from Tokyo.

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