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The Asia Pacific Fund, Inc. Virtual Forum Baring Asset Management (Asia) Limited 19/F, Edinburgh Tower, 15 Queen’s Road Central, Hong Kong Asian Equities: The “Absolute” Case Tel +852 2841 1411 www.barings.com www.asiapacificfund.com Khiem Do Authorised and regulated by the Financial Services Authority December 9, 2008 Asian Equities The “Absolute” Case Cyclical, not secular, growth downturn Healthy balance sheet, plus room to manoeuvre Almost ‘bargain’ valuations A ‘victim’ of forced liquidation 1 The Last Olympic Gold Medal goes to … Synchronised Diving … or … Synchronised Diving Stockmarkets Returns YTD to 31/10/08, in USD terms US -33.00% Europe -45.00% Japan -33.60% Far East ex Japan -52.40% GEM -53.00% China A Shares -64.90% Source: Stock market returns-Factset (11/2008) MSCI USA, Europe, Japan, AC Far East ex Japan, EM and Shanghai SE A Share Index Photo—The Official Website of the Beijing 2008 Olympic Games August 8-24, 2008 2 From Crisis to Crisis Asia Financial Crisis 1997-98 Global Financial Tsunami 2007- Malaysia introduced capital controls Short selling ban Hong Kong Government market intervention Stock lending withdrawal Re-capitalisation – IMF, foreign investors Government rescue plans – our life savings ! China started to “test pilot” margin lending and short selling ! 3 How Asia Has Transformed Itself Pre- and post-financial crisis Pre- 1997 Post- 1998 Deficit Surplus Overvalued Undervalued High World’s major lender Leverage Excessive Deleveraging Capacity expansion Excessive Disciplined Falling Rising Premium Discount Exports Consumption Current account Currency Foreign borrowing Corporate RoE Relative valuation Growth driver Derivative of global growth Driver of global growth Healthier balance sheet and stronger profitability 4 Chinese Economy More sustainable GDP growth Real GDP Growth (year-on-year change, %) (%) CREDIT TIGHENING 16 CREDIT EASING 14 12 9% swing 10 3% swing 10% swing 8 6 4 2 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 0 Pro-active management of the economy to ensure sustainability Source: BCA Research, JP Morgan as at 20 October 2008, Bloomberg 2008-2010 Forecast, Baring Asset Management (5 November 2008) 5 China vs US Decision-Making Process Debating vs doing it US President Congress Voters Treasury Senate CNN Fed States CNBC Lots of debates China The Party JUST DO IT! 6 China Fiscal policy has a lot of room to expand % of GDP % of GDP 3.0 18 2.5 16 14 2.0 12 1.5 10 1.0 8 0.5 6 0.0 4 -0.5 -1.0 2 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E Chinese Government Deficit (Surplus) Chinese Government debt (RHS) Source: CEIC, Credit Suisse estimates (September 2008) 7 0 Asia vs US Savings and Banks’ Loan/Deposit Ratio Gross savings Banking loan/deposit ratio % 120 % of GDP 35 110 30 100 25 90 20 80 15 70 97 10 90 92 94 96 Asia 98 00 02 04 06 98 99 00 US 01 02 03 05 04 06 Asia US Healthier Asian banking system Source: CEIC, JP Morgan as at August 2008 – Gross savings include pension contributions are corporates. 8 Rise of “Chindia” An emerging economic force Total GDP US$m (% ) 14 70 12 60 10 50 8 40 6 30 4 20 2 10 0 0 1990 India 1995 China 2000 2005 2010 2015 2020 Chindia as % of US GDP (RHS) Source: CLSA (11/2008) 9 China vs World Share of world GDP in 2007 GDP growth contribution projection for 2009 Share of World GDP (in %, based on 2007 dollars) Brazil China 2% 6% India 2% Russia 2% Europe 31% 2009 GDP Growth Contribution Projection: Indicative Direction Only China/India 50% Emerging Markets 50% Other emerging 19% Other developed 4% Japan 8% US 26% China: 6%, EM: 25%, Developed World: 69% Source: World & Emerging (2007) - UBS (8/2008) 2009 Projection – Baring Asset Management forecast (11/2008) China/India: 50%, EM: 50%, Developed World: 0% 10 Asian vs US Financials ‘Chalk and cheese’ Do Asian banks deserve the same share price treatment as their US counterparts ? Source: Bloomberg (9/2008), earnings per share average for Asia ex Japan financials & S&P 500 financials 31/12/99 – 01/10/08. Share price performance Asia ex Japan financials & S&P 500 financials, 31/12/99 – 01/10/08. 11 Asian Market Valuations Cheap MSCI AC Asia ex Japan Trailing P/Book Valuation band MSCI AC Asia ex Japan 12-month forward P/E band 800 800 700 600 Index P/B = 1.3 P/B = 1.0 P/B = 1.6 P/B = 1.9 P/B = 2.5 P/B = 2.2 P/B = 2.8 Index P/E = 10 P/E = 14 P/E = 18 700 600 500 500 400 400 300 300 200 200 P/E = 8 P/E = 12 P/E = 16 P/E = 20 100 100 90 92 94 96 98 00 02 04 06 08 90 92 94 96 98 00 02 04 06 Source: MSCI, Citi Investment Research as at November 2008 12 08 10 Asian Equity Markets Valuation Lowest for 18 years! Credit Suisse’s Asian Markets 6 Factor Valuation Indicator 60 40 Price Index 1800 30% overvalued 20 1400 0 Fairly Valued 1000 -20 600 "Buy" signal -40 200 -60 Jan-90 Jan-93 Jan-96 Price Index (LHS) Jan-99 Jan-02 Jan-05 Jan-08 6 factor Asian valuation indicator (RHS) 30 6 factor Asian valuation indicator 2200 Asia ex-Japan Historic P/E 25 20 15 10 5 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Asia ex-Japan - PE Fundamental ‘Buy’ signal hoisted, based on very cheap valuation Source: 6 Factor Valuation Indicator – Credit Suisse (11/2008) Asia ex-Japan Historic P/E - Credit Suisse (11/2008) 13 Global Risk Appetite Still in ‘panic’ mode Global Risk Appetite Since 1981 10 Risk Index Euphoria 5 0 -5 Jan-81 Latest = -4.95 (26 Nov 08) Panic Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Result of de-leveraging and de-risking Source: Credit Suisse (12/2008). Risk Index measures risk appetite of global investors 14 Money Flows: EM Asia De-risking, De-leveraging, and Capitulation Net Foreign Flows in EM Asia (ex-China & Malaysia) Net Foreign Buying in EM Asia (ex-China and Malaysia) 6% 10 (US$bn) 4% 2.7 5 2% (5) 0% (20) Feb-03 -18.3 (15) Feb-04 Feb-05 Feb-06 Feb-07 -14.8 -15.2 (10) -12.9 -10.3 -11.1 -5.4 -4.8 - -2% -4% -6% Feb-08 Monthly Net Foreign Buying in EM Asia 97 98 99 00 01 02 03 04 05 06 07 08 EM Asia ex-China & Malaysia Asia was one of the working ATMs! Note: EM Asia here includes India, Indonesia, Korea, Taiwan, Thailand and the Philippines. Net Foreign Buying in EM Asia – Source: Morgan Stanley (11/2008) Net Foreign Buying in EM Asia ex-China & Malaysia – Source: Credit Suisse estimates (11/2008) 15 End of redemptions in Asian Equities ? Perhaps … Total Foreigners’ net purchases 10,000 US$m 4,147 5,000 4,502 2,681 476 0 -618 -1,754 -5,000 -4,629 -7,335 -10,000 -8,151 -11,453 -15,000 -15,025 -4,870 -10,232 -11,333 -15,473 Inflow Outflow Source: Credit Suisse (11/2008) 16 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 -20,000 -17,548 Asian Stock Markets To the precipice and back! Gross returns in USD, year-to-date to 28 November, 2008 Bear period YTD to 27 Oct 2008 (%) Recovery 28 Oct to 28 Nov 2008 (%) MSCI Taiwan Free -49.4 1.8 MSCI Hong Kong Free -60.9 20.1 MSCI China Free -67.3 36.1 MSCI Korea Free -65.6 9.1 MSCI Malaysia Free -45.3 0.9 MSCI Thailand Free -57.1 5.8 MSCI Philippines Free -58.2 16.7 MSCI Singapore Free -55.3 10.3 MSCI Indonesia Free -63.4 -3.8 MSCI AC Far East Free Ex Japan Gross -60.8 15.0 MSCI India Free -69.1 4.2 Vietnam (HCM Local price index) -64.5 -4.4 Country - Index North Asia ASEAN Source: Factset, Bloomberg 17 The “Absolute” Case for Asian Equities We believe the case for Asia looks compelling unless …. You happen to believe the global economy will be in recession for the next 3 years! 18 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. The contents of this document are based upon sources of information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. 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: © 2008 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): December 2, 2008 19