Strong economic growth, boosted by rising domestic consumption
Improving corporate returns
Undervalued currencies, fair value markets
Secular re-rating expected to continue
Asia: it’s harvest time !
Source: Baring Asset Management (1/2007) Have Asian markets returned to the Bull Super-cycle? Double digit annual returns, decreasing volatility: the best of both worlds !
Year Yearly Returns * Volatility of returns (in % terms)
2003 +45.0 16.3
* Note : MSCI AC Far East Free ex Japan index returns (in %, USD, gross terms)
Out-performance of Asia Secular re-rating continued in 2006 Asia’s out-performance is expected to continue Asia outperformed over the last five years Source : HSBC (12/2006) (80) (60) (40) (20) 0 20 40 60 1989 1991 1993 1995 1997 1999 2001 2003 2005 MSCI Asia ex-Japan return differential over MSCI World MSCI Asia ex-Japan return differential over MSCI USA
Asia-5* : From Crisis to Solid Recovery Stronger discipline on CAPEX spending producing a healthier current account balance Source: Credit Suisse (11/2006) Asia-5 Current Account, $ bn Asia-5 Fixed Investment % of GDP * Asia 5 : Korea, Thailand, Philippines, Indonesia, Malaysia -60 -40 -20 0 20 40 60 80 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006F 2007F -6 -4 -2 0 2 4 6 8 10 12 Asia-5 Current account ($ bn) (% of GDP, RHS) 24 26 28 30 32 34 36 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006F 2007F
The global importance of Asia * Excludes Japan Source: Goldman Sachs Dec 06, based on end 2005 data % Share of US Euroland Asia* World GDP 22 16 31 Official Reserves 1 8 50 Stockmarket Capitalisation 40 18 10 Gap between Asian market capitalisation and strong economics to close in coming years?
Asia: De-coupling from the US? Source: Morgan Stanley (11/2006) US Share of Asian Exports: Lower Than Past Cycles The correlation between Asia & US Industrial Production growth trends has declined Not completely, but increasingly so Export Share: Asia Pac ex-Japan, India & Australia 20.0% 22.1% 22.4% 21.6% 20.7% 20.4% 18.9% 18.3% 17.8% 38.6% 34.7% 35.2% 36.5% 36.2% 38.5% 39.3% 40.1% 39.9% 13.3% 11.8% 12.8% 13.7% 13.9% 12.4% 11.9% 11.3% 10.5% 14.6% 16.5% 16.2% 15.2% 15.1% 14.4% 14.9% 15.6% 16.0% 13.6% 14.9% 13.3% 12.9% 14.1% 14.3% 15.0% 14.7% 15.8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1997 1998 1999 2000 2001 2002 2003 2004 2005 US Asia Pac ex Japan Japan EU Others -10% -5% 0% 5% 10% 15% 1980 1983 1986 1989 1992 1995 1998 2001 2004 -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% US AXJ High Correlation Low Correlation
……… China’s savings ratio continued to rise ! Savings/GDP Source: CEIC, CLSA (8/2006) China’s income growth appears to grow at a faster rate than consumption growth (%) 20 25 30 35 40 45 50 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
China has become a major lender (and investor), while the US remains the world’s largest borrower Source: UBS (11/2006) Major capital exporters and importers (% of total) Negative implications for the US dollar and positive implications for Asian currencies … and gold? Japan 14.4% Saudi Arabia 7.9% Other countries 22.3% Russia 7.2% Switzerland 4.4% Norway 4.3% Singapore 2.9% Netherlands 3.5% Canada 2.3% Venezuela 2.2% Algeria 1.9% Kuwait 2.8% China 13.9% Germany 10.0% Other countries 13.1% Spain 6.9% United Kingdom 4.0% Australia 3.5% France 2.8% Italy 2.4% Turkey 1.9% United States 65.4%
Similar to Japan (and Korea/Taiwan) in the 80s, one notes: China’s ‘deflationary boom’ super-cycle, a strengthening Renminbi, massive liquidity inflows, re-rating of cheap equity market
China is undoubtedly THE growth story of this decade
‘ Non-believers’ in China appear to be gradually ‘converted’
Each decade sees a bubble ….. so is this ……
… .. China’s turn ?
Chinese equities’ rally: Heading towards a ‘bubble’ ? As with Japan, Korea and Taiwan in the 80s …. will a Chinese market ‘bubble’ materialise? Source: Macquarie Bank (11/2006) % change since Jan 02 for China; Jan 82 for elsewhere -500 0 500 1,000 1,500 2,000 2,500 Mth 1 M13 M25 M37 M49 M61 M73 M85 M97 M109 M121 China Korea Taiwan Japan
Chinese equities’ valuation: Still reasonably low Compared to Japan, Korea and Taiwan in the 80s, Chinese equities are nowhere near ‘bubble’ valuations yet Source: Macquarie Bank (11/2006) PE ratios since Jan 02 for China; Jan 82 for elsewhere PB ratios since Jan 02 for China, Jan 82 for Japan 0 10 20 30 40 50 60 70 80 Mth 1 M13 M25 M37 M49 M61 M73 M85 M97 M109 M121 China Japan Taiwan 0 1 2 3 4 5 6 Mth 1 M13 M25 M37 M49 M61 M73 M85 M97 M109 M121 China Japan
Global risk appetite : neutral Still in neutral zone, as economies and markets appear to be at equilibrium levels Source: Crdit Suisse (1/2007) -6 -4 -2 0 2 4 6 8 10 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Euphoria Panic
China consumption and the rise of the middle class
Regional asset reflation – Singapore, Indonesia, Taiwan, Malaysia
Petro-dollar recycling “Middle East construction boom” – shipbuilding, oil services and engineering
Re-construction of Asia – engineering, construction, building materials, capital goods
Improved supply side discipline of “cyclical” sectors – energy, materials, technology
Consumption, Asset Reflation and Re-construction
Investment Professionals KHIEM DO Chair of Asia Multi Asset Group Member of Targeted Solutions Portfolio Construction Group Hong Kong Investment Experience: 30 years Khiem is responsible for the management of a number of specific Asian portfolios, and all Multi-Asset portfolios for clients located in Asia. He was appointed to become a member of the Strategic Policy Group, the company’s global macro research and asset allocation team in 2006. Khiem was the Head of the Asia Pacific Specialist Investment Team from 1997 through 2006. He has been a co-manager of the Baring China Absolute Return (long-short hedge fund) since July 2004. Khiem joined Baring Asset Management in 1996 from Citicorp Global Asset Management in Sydney, where he was the Australian Chief Investment Officer, the chair of the Australian Asset Allocation Committee, and a member of the CGAM International Asset Allocation Committee. Khiem’s prior experience includes seven years at Bankers Trust Australia and seven years at Equitilink Australia Ltd. Khiem received his B.A. in Economics (Hons.) from Macquarie University (Australia). He was designated an Associate Member of the Securities Institute of Australia (the Australian CFA equivalent) in 1979. Khiem is fluent in English, Vietnamese, and French. HENRY CHAN, CFA, CPA Head of Asian Investment Team Hong Kong Investment Experience: 12 Years Henry is responsible for the Asian investment policy and portfolio construction. He became the Head of the Asian Investment Team in 2006. Henry joined Baring Asset Management in 2004 and assumed the lead role in driving our Asian institutional mandates and flagship retail products, namely, Baring Asia Growth and Baring Eastern Trust. At the specialist level, Henry is the co-manager the Baring China Absolute Return Fund and Baring Korea Trust. Henry has extensive experience in the management of both Asian regional and specialist mandates. Prior to joining Baring Asset Management he worked at INVESCO (formerly LGT) where he handled a number of Pacific Basin (including Japan) and Asia ex Japan portfolios. His specialist experience covered a number of markets including Taiwan, Hong Kong, China, Korea and Japan. He was also the lead fund manager of INVESCO Asia NET Fund, INVESCO GT Taiwan Fund and a number of Greater China portfolios. Henry received his Bachelor Degree from the London School of Economics and Political Science in 1992. He was awarded the CPA designation in 1994 and became a CFA in 1997. Henry speaks fluent English, Cantonese and Mandarin. . Last updated: 29 th January 2007
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