Download What Sets Us Apart - Asia Pacific Fund

Baring Asset
Management (Asia)
Limited
19th Floor
Edinburgh Tower
15 Queen’s Road Central
Hong Kong
Tel: (852) 2841 1411
Fax: (852) 2868 4110
www.asiapacificfund.com
The Asia Pacific Fund, Inc.
Investment Outlook & Strategy
www.barings.com
Regulated by the Securities and
Futures Commission
April 2012
Market Sentiment
Last year’s macro concerns have diminished,
opening the door to a more positive outlook in 2012
2011 : “Wall of worries”
Would the US economy
‘double-dip’ without QE3
or fiscal boost ?
Monetary tightening in
BRIC continuing
US government credit
downgrade by S&P
“Club Med” nations’
sovereign debt crisis
Political gridlock and weaker economic trends
in largest OECD nations
Global Imbalances + High Food prices
>>> Global political tension
>>> Equities: BACK TO BEAR MARKET ??? <<<
2012: A more positive outlook
US economy has surprised
on the upside
Monetary easing in BRIC
ECB and BOJ
injected liquidity
in their banking system
“Club Med” nations’
sovereign debt crisis
easing
More resolve among largest OECD nations
to stabilise their banking system and reflate their
domestic economy
Lower commodity prices compared to
12 months ago >> less political tension
(except Middle East ?)
>>> Equities : RALLY since Dec of last year <<<
2
Global Economic Outlook
We expect slow growth, but not a recession
GDP Growth (%)
2010E
2011F
2012F
World
4.0
2.6
2.2
US
3.0
1.7
2.3
Eurozone
1.8
1.5
-0.4
Japan
4.0
-0.9
1.4
China
10.4
9.2
8.4
Asia ex Japan
9.1
7.0
6.5
Global Emerging
7.3
5.8
5.0
Consensus upgraded US but downgraded of Europe and Asia.
Barings assigns a 20% probability to a global recession scenario.
Source: JP Morgan, March 2012
3
China Economic Outlook
Soft landing forecast
Real GDP Growth (Year-on-year change, %)
16
%
14
12
9% swing
10
8% swing
10% swing
8
6
4
2
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E
Despite current negative news flows, we forecast a ‘soft landing’ scenario for China,
with GDP growth between 7.5-8.5% in 2012/13
Source: CEIC, JP Morgan, April 2012
4
China Monetary Trend
A more positive trend soon to emerge ?
M2 growth and Reserve Requirement Ratio (“RRR”) trends
%
RMB bn
35
100,000
90,000
30
80,000
25
70,000
60,000
20
50,000
15
40,000
10
30,000
20,000
5
0
Jan-05
10,000
0
Jan-06
Jan-07
M2, RMB bn (RHS)
Jan-08
Jan-09
M2 % yoy
Jan-10
Jan-11
Jan-12
RRR - Big Banks
As inflation falls, room for RRR to be cut and M2 growth
to rise >>> positive for equity markets ?
Source: CLSA, March 2012
5
Indian Economy
Persistently high inflation
Trends in the Repo Rate and Inflation (%YoY)
Unlike China, India’s inflationary trend remains persistently high,
hence the continuing tightness in its monetary policy
Source: RBI, Office of the Economic Advisor, CIRA, Citi, December 2011
6
Barings’ Valuation of Global ‘Safe Haven’ Assets
Still relatively expensive
10 year US bond real yield
(based on ‘headline’ inflation)
10 year US bond real yield
(based on ‘core’ inflation)
‘Safe’ quality government bonds, as well as ‘defensive’ stocks, remain
expensive, as we are living in a ‘financial repression’ environment
Source: Barings, SPG, March 2012
7
Barings’ Valuation of Global ‘Risk’ Assets
Still relatively cheap
Implied equity risk premium (ERP) of US market
While less attractive than in Oct ’11, equities still offers the best
long-term value among major asset classes
Source: Barings, SPG, March 2012
8
Asian & Global Equities
Earnings growth forecasts and valuations
P/E (x)
*
Div. Yield
(%)
P/BV (x)
Earnings growth (%)
ROE (%)
Country
Current
Trailing
12m fwd
Current
Trailing
Current
Trailing
2010
2011E
2012E
2013E
2012E
Global *
13.2
11.9
2.7
1.7
+40
+8
+11
+13
12.9
USA *
14.1
12.9
2.0
2.1
+48
+16
+9
+13
15.6
Emerging
Asia
12.9
11.2
2.6
1.8
+37
+2
+15
+16
15.1
China
10.6
9.6
3.1
1.8
+34
+12
+10
+12
17.2
Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. US trailing PE is calculated as per reported earnings. For all other markets
and sectors, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using JPM estimates for covered stocks and I/B/E/S estimates for the rest. Companies with
different yearends are calendarised to December yearends and are free float adjusted for aggregation. Historical numbers are from MSCI.
Are IBES analysts still too optimistic in 2012-13, or
are share prices too cheap ?
Source: JP Morgan, March 2012
9
Asia Pacific Equity Market Valuation
Attractive
MSCI Asia Pacific ex Japan
MSCI Asia Pacific ex Japan
12M trailing PB
12M forward PE
23
(x)
3.5
(x)
12M forward PE
21
12M trailing PB
3.0
19
2.5
1.5
-1SD
911 attack and
Asian financial tech bubble;
1.4x
crisis; 1.1x
1.5x
Global credit
crisis; 1.3x
1.6x
May-10
May-11
0.5
May-07
May-08
May-09
May-10
May-11
May-09
Global credit
crisis; 8.9x
1.0
-1SD
SARS; 1.4x
May-03
May-04
May-05
May-06
9.8x
May-07
May-08
May-05
May-06
China hardlanding scare;
10.6x
May-04
May-02
May-03
May-00
May-01
May-99
May-96
7
May-97
May-98
9
11.5x
May-99
13
May-97
May-98
Avg
Asian financial
crisis; 11.0x 911 attack and SARS;
10.4x
tech bubble;
10.9x
Average
2.0
May-96
15
11
+1SD
+1SD
May-00
May-01
May-02
17
Asia Pacific markets appear to continue to trade
at price levels reminiscent of past global and regional crises
Source: Factset, IBES, MSCI, Goldman Sachs Global ECS Research, March 2012
10
Investor Risk Appetite
Sentiment has turned more positive
Source: Credit Suisse (April 2012)
11
Technical Momentum
Equity markets likely to have returned to bull trend
S&P 500 Price Index (strong)
Hang Seng Price Index (weaker)
Short-term correction, then 2nd leg of rally to come ?
Source: Bloomberg (10 April 2012)
12
Key Risks to Our Bullish Scenario

Sustainability of US growth recovery ?

Possibility of sovereign defaults in Europe

Will the Chinese economy ‘hard-land’ ?

High oil prices amid continuing political risks in Middle East

Return to “growth recession” scare in H2 of 2012 ?
Monitoring the above macro issues closely
13
The Fund’s Investment Strategy & Themes

Asian equities rebounded in Q1-2012, helped by the removal of the tailrisk of possible European banking failures following the recent ECB’s
LTRO programme, plus continuing positive economic surprises in the
US, monetary easing in Asia, and an underweight global investor.

The Fund has been accumulating quality growth stocks, businesses with
strong global or domestic brand names. The Fund is overweight in
Consumer Discretionary and Technology sector.

We continue to believe that the strong fundamentals of Asian economies
and corporates will be reflected in higher share prices longer-term, once
the European debt crisis is resolved.
14
Important Information
This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its
investment adviser affiliates in other jurisdictions. The affiliate serving as the Asia Pacific Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the
United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services
and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.
This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their
directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or
dispose of any such investment. This document may include forward-looking statements, which are based upon our current opinions, expectations and projections as of
the date on the cover hereof. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those
anticipated in the forward-looking statements. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past
performance will not necessarily be repeated. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are
additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Compensation
arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available.
Private investors in the Company referred to herein should obtain their own independent financial advise before making investments. This document must not be relied
on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and
prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis of
dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and other
material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions.
Research Material
Baring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of
research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions
expressed herein may change at anytime.
For data sourced from Morningstar: © 2012 Morningstar, Inc. all rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible
for any damages or losses arising from any use of this information.
Complied (Boston): 10th April, 2012
15