International | Oct 17 2007
By Chris Shaw
The Australian stockmarket has recovered well from the recent global liquidity crisis but in percentage terms lags well behind other Asian markets, GaveKal Research pointing out the MSCI Asia ex-Japan has risen 44% year-to-date in US dollar terms this year and 37% since the lows of mid-August, while Shanghai is up 129% and Hong Kong has gained 84%.
Credit Suisse suggests the gains are suggestive of a bubble forming, but along with GaveKal suggest it may yet be some time before the bubble finally pops. The GaveKal view is bull markets die of disease rather than simply from old age and to date there are few signs of serious disease in Asian markets, particularly as liquidity levels remain high.
It is this liquidity that has driven the markets in the region higher in recent months, Credit Suisse noting all the other market drivers such as earnings and yields are neutral at best currently.
Looking at how much further markets in the region could run the broker suggests an ideal, blue-sky scenario could see markets more than double from current levels, while a bull market scenario implies further gains of 20-40%. Assuming things take a turn for the worst the broker sees scope for a more than 50% correction from current levels.
GaveKal suggests the major cause for concern regarding Asian markets is a slowdown in the US economy, as it is thought such an event would result in the relative appreciation of the Asian currencies, which would in turn lead to a drying up of demand for Asian exports.
The group doesn’t expect such an outcome to play out though, suggesting instead as a number of Asian companies have adopted platform models for their operations they are well placed to quickly shift their business to other and faster growing markets, particularly those within Asia.
At the same time the analysts note any US slowdown may in fact make US consumers more selective, which would likely benefit Asian producers as they are generally among the lower cost producers globally and so would feel less of an impact.
GaveKal also notes the region’s infrastructure boom is still in the early stages, meaning money will continue to be spent on projects that will boost economic growth in the area and this should prove supportive.
While the recent gains would ordinarily lead investors to wait for a pullback before entering the market GaveKal notes there may not be a significant correction for some time, meaning getting set could prove difficult. As a result the analysts favour establishing a diversified portfolio through the region.
Credit Suisse is a little more specific and has lifted its weighting in Thailand to 1.85x overweight the benchmark as it sees this market as offering the best value and growth prospects, while seeing some potential positive catalysts in the shorter-term.
The broker has reduced its Overweight position in Singapore slightly as it now sees better opportunities in other markets, while the major changes are reserved for Hong Kong and the Philippines with the former being cut to Marketweight from Overweight and the latter being increased to Marketweight from No Weighting.
China remains at Marketweight and the broker notes while it and the Hong Kong markets now appear expensive they are still enjoying the benefits of ongoing fund inflows, while at the same time being good plays on any asset inflation and a weakening in the US dollar.
