Investing in Asia
Much of the reporting on investment markets within the financial press tends to be focused on the UK, Europe and the US. It is sometimes easy to forget about the many market-leading companies and excellent investment opportunities within Asia.
The following is a view of the region.
Signs of recovery have led to rising optimism in the world’s second-largest economy. But this is really a tale of two economies: the new of e-commerce, tourism and consumption, and the old of steel, coal and shipbuilding.
There’s a lot of excitement around ‘new economy’ companies but there are also signs that China might not be able to maintain its recent fast growth. Costs, especially labour- related, are rising. We’re seeing a small rebound in consumer spending, but this is restricted to certain cities. Accordingly, picking the right companies in the right locations is crucial.
While there are signs of improvement in the ‘old economy’, problems remain. Stability has been achieved through stimulus and government intervention, but further economic reforms are needed, which could have negative effect on the economy in the short -term.
Turning to the other Asian giant, investors have been encouraged by Indian Prime Minister Narendra Modi’s economic reforms. However, companies face potential difficulties due to US plans to restrict the entry of skilled foreign workers which affects Indian IT companies with US operations such as TCS and Infosys. Therefore, companies remain reluctant to invest, preferring instead to pay down debt and cut costs.
Demand for consumer goods is improving slightly, but the recent upturn in the prices of metals and other commodities is reducing profits in some companies. There are also big differences between well-run private sector companies and lower quality state-owned enterprises. This has given rise to innovative private sector lenders taking market share from state-run counterparts in the banking sector.
In contrast to India, last year’s rebound in commodity prices helped avert recession in Australia. However, mining company executives are all too aware that the economy is very dependent on Chinese demand for commodities.
Also, concern is growing over property prices and related household debt. In Western Australia, the state most associated with the mining boom, residential demand has already plummeted while signs of a potential property bubble in Melbourne and Sydney are increasing.
THE EXPORTERS – JAPAN, KOREA & TAIWAN
While the threat of the US imposing import restrictions makes planning for some Asian exporters difficult, the outlook for Japanese car manufacturers remains positive. Around 80% of Honda cars that are sold in the US are made there, and the corresponding numbers for Toyota and Nissan are 60% and 65% respectively. The growth in demand for robotics could also benefit Japanese companies such as Fanuc and Keyence that produce robots or parts for them.
South Korea presents an interesting picture. On the one hand it is facing political change with a new leader having been elected who has to deal with missile testing by the country’s northern neighbour and Chinese sanctions in retaliation for accepting US military assistance. On the other hand, the country’s big companies such as Samsung are pushing the national benchmark index, the Kospi, to record highs. If Korean exporters can continue to improve efficiency and governance as well as establishing pro-US manufacturing methods, the future could be bright.
As with Japanese car manufacturers, Taiwanese manufacturer Hon Hai Precision Industry plans to spend US$7 billion building a plant in the US, while Taiwan Semiconductor is considering moving production to the US. Semi-conductor manufacture constitutes a significant proportion of the Taiwanese economy, so if these precision companies can keep the US onside, it too could deliver growth over the foreseeable future.
ASEAN – MALAYSIA, THAILAND & INDONESIA
The past couple of years have been tough for the smaller Asian players, with the challenges of high household debt and limited consumer spending. As a result, many regional banks expect growth of only 3%-5% in loans this year.
However, infrastructure spending gives cause for optimism. In Malaysia, for example, demand for infrastructure projects including intercity railways and motorways, is at a historic high.
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Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at June 2017. Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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