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Asia – The re-rating continues
“What’s been driving Asia’s re-rating and
can this continue?”
Greg Kuhnert
Fund Manager
Investec Asset Management
March 2007
Outline
● Macroeconomics – structural growth
● Governance is improving
● Valuations
● The Risks
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Macroeconomics – structural
growth
Macroeconomics
GDP
=
C
C = Consumption
I = Investment
G = Government expenditure
(X – M) = Net exports
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+
I
+
G
+
(X – M)
What’s driving the re-rating?
● Exports: Global outsourcing continues
● Rise in consumerism
● Investment needs to rise
● Rising Asian wealth and savings
● Improved macroeconomic stability
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Global outsourcing continues…
Manufacturing wages, $ per hour
Chinese share of US sea imports
Outsourcing from Europe to catch up
with USA
Index US=100, ($23.17)
140
Average hourly compensation costs of mfg workers: 2004
120
100
Machinery
60
40
20
Automotive
80
0
US
China
US China
India
Brazil
Brazil
Mexico
EU-15
Japan
Asian
NIE's*
Asia
* Includes Hong Kong, Korea, Singapore, and Taiwan. Source: “China: Is the outsourcing party over? Part
Source: National sources, Morgan Stanley Research
II”, UBS, 20 September 2005
Source: Eurostat, US Census Bureau, UBS
●
Outsourcing driven by Chinese entry to WTO in 2001 (and low wages)
●
Further growth from higher value added products (e.g. automotive and machinery)
●
Outsourcing from Europe in its infancy
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Consumption
Real GDP growth ex Japan
and China
% of Chinese disposable income
Gross household financial debt
1990 vs 2004
Source: CEIC, UBS estimates
Source: CSFB research
Source: CEIC, UBS estimates
●
Consumption as % GDP is low compared to historical
●
Savings (in cash) is high
●
Potential for emerging Asian consumers to leverage up further
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Investment needs to rise
Gross investment share of GDP
Rising capacity utilisation rates
85
80
%, 6mma
75
70
65
60
55
50
96
97
98
Korea
Source: CEIC, UBS estimates. Note: “Asian export economies”
refers to Asia excluding Japan, China and India
Source: CEIC, HSBC
●
Investment as a share of GDP is low
●
Ex China, capacity utilisation unsustainably high
●
Companies have capacity on their balance sheets
●
Regional infrastructure needs upgrading/expanding
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99
00
Taiw an
01
02
03
Thailand
04
05
06
Philippines
Investment – examples
Government
Name
Total value
Country
MRT train line extensions
$4.4 billion*
Taiwan
Subway in Gwangju City
$1.7 billion
Korea
Name
Total value
Country
Powerchip and Elpida 12”
Memory Fab
$0.48 billion
Taiwan
Tangguh LNG Project
$5.5 billion
Indonesia
Palm oil development
(CNODC et al)
$5.5 billion
Indonesia
Private
* Subject to legislative approval
Source: JP Morgan
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Development of savings market
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●
Demographics point to rising dependency
ratios by 2025
●
Currently most savings in cash and bonds
●
Asian wealth forecast to rise substantially
●
Required increase in equity allocation is
substantial
Improved macro-economic stability
Country
As a % of GDP
FX reserves
accumulation
Current account
balance
CPI (yr on yr)
China
9.6%
9.3%
1.6%
South Korea
3.2%
0.1%
2.2%
Taiwan
3.6%
5.8%
0.6%
Singapore
15%
24.5%
1%
Source: “Asian Economic Monitor”, UBS, Jan2007
Price in USD
Under/over
valuation to the
dollar %
United States
3.22
-
Britain
2.67
+21%
China
1.41
-56%
Hong Kong
1.54
-52%
Indonesia
1.75
-46%
Malaysia
1.57
-51%
Philippines
1.74
-46%
Singapore
2.34
-27%
South Korea
3.08
-4%
The Big Mac Index
Source: The Economist
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Different to 1998
● Current accounts are in surplus
● Core inflation is moderate
● Currencies are undervalued
● Lower risk premia
Governance is improving
● Political Change
● Corporate Governance
Political change
In the past…
…now
China
● Deng Xiaoping commences
reform process
● Wen Jiabo and Hu Jintao
assume leadership in smooth
transition
Hong Kong
● British Rule
● Chinese rule – 1 country, 2
systems
Indonesia
● President Suharto
● 2004 – President Yudhoyono
the first elected by
independent vote
South Korea
● General Chun Doo Hwan –
● President Roh Moo-Hyun –
eventually jailed for 3 years for
human rights advocate
corruption
Malaysia
● Dr Mahathir’s 22 year reign
commenced in 1981
● Popular mandate to PM
Badawi and Anwar Ibrahim
released from jail
Taiwan
● Martial Law
● Chen Shui-ban elected in
2000
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Improving corporate governance
Type
Example
Disposal of non-core
assets / restructuring
● China Resources Enterprise
● Hutchison Whampoa
● China Overseas Land and Investment
● Hong Kong and Singapore property REITS
Increasing dividend
payouts / special
dividends
● Hong Kong Exchange & Clearing
● Singapore Exchange
● Digi.com
● Taiwan Semi-conductor
● Singapore Telecom
● United Microelectronics
Improved disclosure / ● Venture Corporation, CNOOC, Kerry Properties and many others
Investor relations
Appointment of
● SK Corp
Independent Directors
Higher returns on equity = higher valuation multiples
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Valuations
Scope for returns to rise through
gearing
Source: Goldman Sachs
Gearing levels are falling
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Valuation levels are attractive…
Valuations are attractive on a price to book basis.
2006 PE
EPS growth
(2007/2008)
Asia ex Japan
16.2
15%
2.5
Developed World
18.3
12%
2.3
PB
16%
ROE
14%
2.1
12%
Source: UBS
1.9
PB (x)
Asia ex-Jp - PE
World - PE
30
1.5
8%
25
1.3
20
1.1
15
0.9
10
0.7
2%
5
0.5
0%
6%
Source: UBS
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Source: UBS
May-06
May-05
May-04
May-03
May-02
May-01
May-00
May-99
May-98
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
0
May-97
4%
ROE (%)
10%
1.7
35
The Risks
The Risks
● Trade war with the US
● Hard landing in China
● Global risk aversion
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Summary
● Asian re-rating driven by:
− Structural growth
− Improving governance
● Valuation still attractive relative to history and global equities
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Contact information
Stephen Capon
Sales Manager
Tel: + 44 (0)207 597 2142
Email: [email protected]
Investec Asset Management
2 Gresham Street
London
EC2V 7QP
United Kingdom
www.investecfunds.co.uk
Telephone calls may be recorded to confirm your instructions
March 2007
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Thank you