Wednesday, February 08, 2006

Asian Equity Markets Have A Lot Of Ground To Make Up

In one of my earlier blogs last month, I said that Asian markets are in for a good year in 2006. Well, actually not just in 2006 but probably for the next few years. Back in 80s or even 90s, investing in Asian stocks was deemed so exotic that its like taking an occassional safari trip for European/American fund managers. Despite the boom years for Asian equities in 93-96, many professionals still regarded Asian markets and even Asian economic growth as cyclical and temporary. That view had some truth in it as in decades past, much of Asia was producing primary goods, non-value-added products, churning out low-end cheap products - all of which are susceptible to cyclical effects and not much long term sustainability.

The situation, especially after the 97 financial implosion, have seen major developments in many important fronts in Asia. The rise of out-sourcing to China, the rise of middle class consumerism in China. The same pattern being replicated in India albeit 5-8 years behind China. The excesses of the 90s being wrung out of the financial systems of most Asian economies. South Korea and Taiwan moving up the technology and design curve appreciably. Singapore edging ahead in the war with HK for financial center supremacy. The (minor but significant) steps taken in the eradication of corruption in Asian economies. More importantly, significant steps have been made to finally drag Japan out of the financial doldrums with Koizumi staying long enough to effect important changes particularly with respect to abolishing cross-holdings, restructuring postal savings scheme, opening up of Japanese companies to foreign interest, and a renewed penchant for corporate restructuring.

All that is happening with the consumer base of two of the largest populated markets in the world (India and China). Hence to view Asian equities as cyclical would be dangerously foolish and uninformed. Asia grew at an impressive 7.3% in 2004, according to the Asian Development Bank. In fact, 2004 marked the region's "best growth performance since the Asian financial crisis of 1997-98". First-quarter 2005 data supports the view the region remains on an upward trend. India grew at a 7% rate while Malaysia registered 5.7% growth over the same period. Japan registered 5.3% during the first three months of 2005. That trend has basically continued going into 2006.

Asia is still a place where we can produce manufactured goods for export cheaply, but is quickly moving up the value-added ladder. More importantly, Asia is now a crucial market place for commodities, consumer goods and to a lesser extent services. Less appreciated is the fact that Asia is quickly becoming a hub for advanced R&D (research and development), as well as design, production, and test-marketing of higher-end products such as automobiles, consumer electronics and a range of technological applications and services. Asian governments are supporting these trends by investing in education and infrastructure, offering favorable tax and regulatory treatment, and reducing tariffs and other barriers. These measures, as well as Asia's underlying attractiveness, are helping to facilitate record numbers of cross-border transactions as well as rising trade and investment flows into the region. Plus after the 97 implosion, Asian countries are a lot friendlier to one another, and there is renewed need for more cross-border trade, cooperation and inter-dependency among Asian countries.

Before this becomes another useless economics paper, my main point is that back in 2003, Asia accounted for only 11% of the total global equity market capitalisation. Currently, Asia accounts for slightly more than 20% of total global GDP. Asia could very well rise to the 25% figure (of global GDP) within the next 10 years. Bearing in mind also that Asian bourses have a much higher percentage of its GDP that is listed compared to the rest of the world, so the 11% figure is more skewed. All said, more and more professionals recognise these important trends in Asia. Even if Asian equity markets were to gain just 10% a year from here on, it would take at least 10 years before Asian equity markets reaches anywhere near parity with its share of GDP production and consumption patterns. Here's to a good 10 years for Asia... at least!


zentrader said...

Very good article. Thanks for sharing us your knowledge.

DanielXX said...

Hi Salvatore,
I find that most of your articles are very interesting and well-written, well-argued. Wonder what is your motivation for writing your blog? Do you operate any other businesses?

Salvatore_Dali said...

TY zentrader for yr kind comments. As for you Daniel, lol... inherently, even when I got into equity research, it was a marriage of two loves, writing and business. Do you think I can charge people for what i blog? lol... Maybe I can turn this into a wierd book on non-fiction commentary and comedy on business... who knows, know any publisher?? When I get down to Singapore, maybe we can chat more on "other businesses"... cheers.

DanielXX said...

My friend Salvatore,
You sure can. Frankly, I've combed through quite a number of blogs in Singapore but in terms of personal depth yours is one of the best.

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