Now could be a good time to buy Asian equities if you are long-term investor.
Asian markets are attractively priced following the recent market correction. The region is now trading at a forward price to earnings ration (P/E) of 10.5x, which is at a deep discount to the five year average of around 13x. This is more than one standard deviation away from the five year average and is the second cheapest that you could buy Asian markets in a decade.
Asian corporate balance sheets continue to be in very healthy shape, and economic growth continues in Asia. On a Price to Book basis the current valuations are 1.8x book value, versus five year average of 2.1x and with the return on equity much higher than that of 10 years ago.
So, from a valuation standpoint, this is the second best time to be buying Asian stocks in 10 years. There are risks in the US and Europe but these risks are more than priced in at the moment. I am still comfortable with the growth outlook in Asia, which should significantly outpace the rest of the world in the coming years.
There are also some positives for Asia that arise from slower global growth. Many Asian economies – including China, Singapore, Korea Taiwan and India – introduced policy tightening measures due to their strong growth. Slower global growth and the resultant lower commodity prices, especially oil prices with Asia being a big energy importer, will help to reduce some of the inflationary pressures in Asian economies. This will provide policy makers a reprieve on what was expected to be further tightening measures.
This is why I have recently moved China from underweight to a small overweight. Currently, China is trading at a forward P/E of 9.5x, which is at a significant discount to its 5-year average of 13.5x. I am definitely seeing more attractive buying ideas in China.
Typically when you see the P/E of a stock that is the same as the sustainable dividend yield you are getting a great buying opportunity. This is especially so when these companies still have good prospects for growth. Recently there have been an increasing number of attractive opportunities that have emerged.
As for the prospect of a double dip recession in the US impacting Asia, we have just seen of US listed companies report Q2 results, and with 83 per cent of them having reported, earnings are on average 5 per cent better than expected.
Clearly corporate America continues to be in good health and this is also being reflected in strong hiring by the private sector.
Unfortunately the government (local and federal) are going through austerity measures to reduce debt and this is seeing some dismissals and so the overall unemployment remains more subdued.
Despite the slower growth expectations, I don’t foresee a double-dip scenario in the US. Q2 growth in the US was impacted by the supply chain disruption caused by Japan’s tsunami, especially for the auto industry, and by higher oil prices. US growth is expected to slow to less than 2 per cent for 2011 and 2012, rather than 2.5-3 per cent that the market has previously projected. However, as we move into Q3 and Q4 the auto industry’s supply chain disruption should begin to unwind.
David Urquhart is portfolio manager of the Fidelity Asia Fund.
