Russell Asian Barometer: Asian economies are mostly structurally sound but markets unlikely to recover until the global storm abates
China remains most attractive market with low PE, big fiscal plans and realistic earnings expectations
SINGAPORE December 4 2008 - Russell Investments, in its third edition of the quarterly Asian Market Barometer, says that the full force of the export downturn is yet to
hit and therefore expectations for economic growth and earnings across the region could suffer further downturns. The Russell Asia ex Japan share price index fell 42% over the three months to the end
of November, exceeding the 30% decline in the S&P 500.
Andrew Pease, Russell’s Asia-Pacific Investment Strategist and the author of the Asian Market Barometer says “Investors around the world are asking the same two questions: how much more bad news is yet to come and how much of this is already priced into share valuations?”
“The answer to the first question is plenty more”, says Pease. “The virtual freezing of the global credit markets since September means that economic indicators every everywhere are falling at an unprecedented rate. Volatility will remain high until a solid consensus forms on the profit outlook or 2009.”
Pease believes the second question is slightly easier to answer: “Equity markets have priced a lot of bad news already. The MSCI developed world share index is trading on a 12-month ahead price to earnings (PE) ratio of 9.0 times, down from 15 times in mid 2007 and the lowest in at least 20 years. Asia ex-Japan is trading on an 8.9 times PE ratio, marginally above the 8.4 times recorded in mid-1998.”
Economic outlook: shaken but not stirred
In many respects, Asia’s economies appear well placed to avoid the worst of the financial crisis. Most countries have current account surpluses, government debt levels are relatively low and fiscal positions are in surplus or modest deficit (aside from India and Malaysia). Central banks in Asia have built huge foreign exchange reserves; in just six years China’s reserves have grown from US$300 billion to US$2 trillion.
With the exception of Korea there is little evidence of excessive borrowing by households. This means that consumer de-leveraging and rising savings are unlikely to be anywhere near as severe as developed countries.
Pease explains that at the time of the last Russell Barometer the consensus was that Asia could achieve 6% growth in 2009 broadly in line with the 10-year average. The forecast now is 4% which if achieved would be the weakest growth outcome since 2001. Even so, this is a more optimistic outlook than for the US where forecasters expect the deepest recession since 1982.
“Asia’s exposure to the global credit crunch comes mostly through exports and the impact of the crisis on business sand consumer confidence. Financing is less of an issue given the abundance of savings within the region, the ability of banks to fund loans through deposits and the limited exposure of Asian financial institutions to sub-prime debt securities”, says Pease.
The question mark for Asia
The big question mark for Asia is the depth of the export downturn. Pease says that given the fact that trade linkages are likely to be more important than the credit flows for Asia next year, the best guide to the impact on the different countries comes from export exposures. Hong Kong and Singapore, the two most export exposed economies are expected to have the biggest downturns next year. China, India and Indonesia, the economies with more independent domestic demand, are expected to experience relatively milder growth slowdowns.
A view to a rebound
The Russell Asian Barometer summarises by explaining that Asia’s economies are mostly structurally sound and, with the exception of Korea, are unlikely to experience directly the de-leveraging that will constrain the medium term growth prospects across the G-3. The report says Asia’s markets will not recover until the global financial storm abates and investors becoming willing to take on risk once again. When this happens, however, Asia has the potential to be a significant outperformer in the global rebound.
Andrew Pease is an investment strategist for the Russell Investment group. In his role Andrew conducts research on the economy, capital markets, portfolio strategist as well as investor behaviour. He has extensive financial industry experience as an economist, investment strategist, fund manager and central banker.