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Khiem Do – Head of Asian Equities December 2005

THE ASIA PACIFIC FUND, INC. Closed End Funds Virtual Forum 2006 : Outlook for Asia Pacific Markets. Khiem Do – Head of Asian Equities December 2005. Table of Contents. Section 1: 2006 : Outlook for Global and Asia Pacific Region Section 2: 2006 : Outlook for major Asia Pacific Markets.

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Khiem Do – Head of Asian Equities December 2005

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  1. THE ASIA PACIFIC FUND, INC.Closed End Funds Virtual Forum2006 : Outlook for Asia Pacific Markets Khiem Do – Head of Asian Equities December 2005

  2. Table of Contents Section 1:2006 : Outlook for Global and Asia Pacific Region Section 2:2006 : Outlook for major Asia Pacific Markets

  3. Section 1: 2006 : Outlook for Global and Asia Pacific Region

  4. Equity Returns Sustainable (I) (Productivity Strong, Super Cycle) Inflation Scare (III) (Cyclical commodity boom bust) Deflation Returns (II) Growth (Commodity Collapse) Sustainable “Super Cycle" vs Alternative scenarios Source: Citigroup (08/2005) “Sustainably strong” growth remains our base case scenario

  5. BAM’s 2006 Key Global Forecasts • G7 economies expected to grow at long-term trend rates • G7 core inflation likely to remain below 2% • US Federal Reserve likely to pause when rates reach 4.50% by end Jan ’06 • USD likely to reach a peak by Q1 ’06 • Oil prices likely to range trade between $US 45 – 65 /bbl Source: BAM (11/2005) A benign global backdrop

  6. Global Monetary Conditions: US vs others DrKW Global Monetary Conditions Index This, in part explains the poor performance of US vs Japanese/European equity markets Source: Dresdner Kleinwort Wasserstein (DrKW) Macro Research & Thomson Financial Datastream (15/11/2005)

  7. Global Purchasing Managers’ Index: Strong Synchronised inventory-rebuilding-led growth Source: NTC Research, Reuters & Dresdner Kleinwort Wasserstein (DrKW) Macro Research (15/11/2005)

  8. G7 Headline Inflation at 15 Years’ High, but Core Inflation Stays Low Well-behaved core trend Source: Dresdner Kleinwort Wasserstein (DrKW) Macro Research & Thomson Financial Datastream (15/11/2005)

  9. 6 4 2 0 Real rate 5% - 5.5% prior to 1990 and 2001 recession -2 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06E Real Fed funds rate Real US Fed Fund Rates: Rising towards long-term equilibrium levels Source: UBS (11/2005) We expect the Fed to pause its tightening when FF rates search 4.50%, implying a real rate of 2.50%

  10. Global Technology Demand: Picking up Dr KW model of worldwide semiconductor sales Dr KW Asian export model Source: CEIC, Dresdner Kleinwort Wasserstein (DrKW) Macro Research Estimates (15/11/2005) Asian Technology to benefit in short-term

  11. BAM’S 2006 Key Asia Pacific Forecasts • China expected to continue to grow solidly (8 – 9%) and drive the region • Recovery of Japan is an added bonus • Other Asian economies likely to grow at long-term trend rates • Asia Pacific central banks unlikely to strictly follow the US Fed (domestic conditions matter more) • Asia Pacific currencies likely to strengthen modestly vs the USD Source: BAM (11/2005) A favourable economic backdrop for the region

  12. %YoY 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 India Korea China Taiwan Thailand Australia Malaysia Indonesia Singapore Philippines Hong Kong Asia Pacific Economies: Solid growth GDP Growth 2Q 05 Source: Merrill Lynch (2Q 2005) China is expected to continue to drive the region’s growth

  13. %YoY3mma %YoY OECD Leading Indicator (LHS, Pushed Forward 3 Months) 8 50 Asian Exports 6 40 4 30 2 20 0 10 -2 0 -4 -10 -6 -20 96 97 98 99 00 01 02 03 04 05 Global Economic Short-Term Trend: Favorable for Asia Pacific Source: Merrill Lynch (11/2005) Asia Pacific exports likely to benefit

  14. 30 5 25 4 20 3 15 2 10 5 1 Jan-02 Jan-04 Jan-86 Jan-88 Jan-90 Jan-92 Jan-04 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-94 Jan-02 Jan-86 Jan-88 Jan-90 Jan-96 Jan-98 Jan-00 PE Asian Equity Valuations: Still cheap Historic PE Dividend Yield Div. Yield Source: UBS (11/2005) Low P/E, high dividend yield

  15. 40% 30% Overvalued 20% 10% 0% -10% -20% -30% -40% Undervalued Phil India Korea China Taiwan Thailand Malaysia Australia Indonesia Singapore Hong Kong Asia Pacific Markets: Relative Valuation P/BV less ROE relative to Asia ex Japan currently Source: UBS (11/2005) China, Thailand and Korea appear more attractively valued than Malaysia and India

  16. 60% 40% 20% 0% -20% -40% -60% -80% Asia Pacific Sectors: Relative valuation P/BV less ROE relative to Asia ex Japan currently Overvalued Undervalued Con Basic Tech Telcos Utilities Energy cyclical cyclical Con non Financial materials Industrial Source: UBS (11/2005) Basic Materials and Energy appear more attractively valued than Technology and Consumer Non-Cyclicals

  17. Global Risk Appetite: In “high zone” currently Source: CSFB (11/2005) Investors appear to get set for a Q4 rally, but markets overbought in short-term

  18. Concluding Remarks • Asia Pacific economies and markets are expected to continue to out-perform the world in Q4 ’05 and in 2006 • Maintain a cyclical/growth bias (but more moderate) in our portfolio in coming months • Research focus on defensive growth names in preparation for a potentially more challenging 2006 Source: BAM (11/2005)

  19. Section 2: 2006 : Outlook for major Asia Pacific Markets

  20. Hong Kong/China: Slight Overweight • Solid economic growth in China expected to continue • HK economy and property sector being negatively impacted by US monetary tightening  mid-cycle correction • HK market expected to out-perform when US Fed pauses • Under-leveraged household sector • China’s market valuation is cheap, while that of HK is fair Source: BAM (11/2005)

  21. 0.9 85% 0.8 90% steel consumption/capita 0.8 0.7 80% urban population ratio 80% 0.7 0.6 75% 0.6 70% 0.5 70% 0.5 60% 0.4 Urban population ratio % Urban population ratio % Finished steel consumption/urban capita t Fin. steel consumption/urban capita t 0.4 65% 0.3 0.3 50% 60% steel consumption/capita 0.2 0.2 40% 55% 0.1 0.1 urban population ratio 0.0 50% 0.0 30% 1950 1960 1970 1980 1990 2000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 90% 1000 Japan China millions of people 80% US India 800 70% 60% Japan China 600 50% US India 40% 400 30% 20% 200 10% 0 0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 1990 2000 1900 1910 1920 1930 1940 1950 1960 1970 1980 2010E 2020E 2010E 2020E Urbanisation of China : A key secular driver of materials demand Steel and urbanisation in US Steel and urbanisation in Japan Urbanisation rates, people Urbanisation rates % of total Source: UBS (11/2005)

  22. 16 20000 80 Hong Kong Valuation 12 Indicator (HKVI, RHS) 60 16000 Fed funds rate 4%, HIBOR 4.18% +40% "Sell" 8 40 12000 Hong Kong valuation indicator Hang Seng Index 20 4 8000 0 0 4000 -20 -18% "Buy" Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Hang Seng Oct 98 -27% Index (LHS) Apr 03 -34% 0 -40 US Fed funds rate HIBOR Feb-86 Feb-89 Feb-92 Feb-95 Feb-98 Feb-01 Feb-04E Hong Kong: Rising HIBOR rates HIBOR has risen to 4.3% vs 4% Fed fund rate 6 factor model estimates 5% HIBOR priced in Source: UBS (11/2005) Rising rates have hurt residential property market in the short-term, but 5% HIBOR rates priced in

  23. Korea: Overweight • Fall in oil prices and continuing participation of local investors help to boost market • Household and corporate debt situation improving • Earnings to recover as the domestic and global economies remain solid • Secular re-rating of this cheap market expected to continue Source: BAM (11/2005)

  24. Now PE= 8.8x 1,300 PE= 17.2x 1,200 PE= 18.8x PE= 14.1x 1,100 1,000 900 800 700 600 500 400 300 200 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Korean Market: Different this time ? KOSPI near all-time high, but current PE is well below historical peaks Source: UBS (10/2005) Valuations still not stretched

  25. Yield Gap (p) (%) 1,400 KOSPI (LHS) 21% Yield Gap (RHS) 18% 1,200 15% 12% 1,000 9% 6% 800 3% 0% 600 -3% -6% 400 -9% -12% 200 -15% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Korean equities: Stocks still under-valued compared to bonds Note: Earnings yield gap t (%) = bond yield t - earnings yield t Source: Hyundai Securities (11/2005) Yield gap suggests that equities are still attractive vs bonds

  26. (Won bn) 3,500 Balance of equity funds 21,000 3,000 19,000 2,500 17,000 2,000 15,000 13,000 1,500 11,000 1,000 9,000 500 7,000 0 Jul-04 Jul-05 Jan-04 Mar-04 Jan-05 Sep-04 Nov-05 Sep-05 Mar-05 May-04 Nov-04 May-05 -500 -1,000 Jul-05 Oct-04 Oct-05 Jul-04 Jun-05 Apr-05 Apr-04 Jun-04 Jan-05 Aug-05 Jan-04 Aug-04 Sep-05 Sep-04 Mar-05 Dec-04 Mar-04 Feb-05 Nov-04 Feb-04 May-05 May-04 Korean Liquidity surprise: Strong domestic fund flows Monthly net inflow into equity fund Monthly net inflow into equity fund (Won bn) Source : UBS (11/2005) Domestic participation is a necessary condition for market re-rating

  27. Taiwan: Underweight • Still no new development on the Cross-Straits link issue and uncertainty surrounding December city elections • Low participation of retail investors does not bode well for the market • Technology still the key driver of stock market • Market valuation is moderately cheap Source: BAM (11/2005)

  28. Singapore: Neutral • Steady economic growth expected • Reflationary policy endorsed • Corporate re-structuring encouraged • Market valuation at fair levels Source: BAM (11/2005)

  29. ASEAN: Underweight • Steady economic growth expected • Lackluster earnings growth forecast for 2006 • Thailand is the favored market, based on attractive valuations • At lower levels, Indonesia could become a long-term attractive market Source: BAM (11/2005)

  30. 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. Complied (Boston): November 29, 2005 Ensure Complied Date is added at foot of Disclosure

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