Overall, 2013 wasn’t the best year for Asian markets, however there are several trends emerging that we believe will be good for the region this year:
-Export growth is picking up in the region, as demand from developed nations has increased.
-China is no longer decelerating, and its economy has stabilized.
-What’s more, the Chinese government has begun implementing reforms that we believe will have positive long-term benefits.
A closer look at Thailand
While there has been political turmoil in Thailand recently, it shouldn’t have come as a surprise to investors, as, since 1946, Thailand has averaged a coup every 7 1/2 years, with the last coup occurring in 2006.
Thailand’s equity market dipped by 20% over the course of 2013 due to the political uncertainty. This has created some attractive valuations and we have been deploying cash to take advantage of this opportunity, not only in Thailand, but throughout the ASEAN (Association of Southeast Asian Nations) markets, including Indonesia, Philippines and Singapore.
Investors have reduced their expectations about Asia, and we believe they are more realistic about the region than they were in recent years. In fact, analysts have recently begun to raise their earnings forecasts — the revision cycle has just ticked upwards after two years of downgrades.
When we examine valuations in the region, we see that they are more constructive than in the past, trading at a 15% discount to developed markets. However, high-quality stocks have held up better than the overall market, therefore investors have to be selective when searching for quality bargains. Such opportunities don’t arise very often, but we are finding more now than we have in the past.
Where we see opportunity
We select stocks after stringent evaluation of three company characteristics: earnings, quality and valuation (EQV).
In this environment, we see real opportunities in Samsung Electronics in Korea (1.69% holding of Invesco International Growth Fund as of Dec. 31, 2013). In the fourth quarter, we’ve added to our position in Taiwan Semiconductor Manufacturing Company (1.19% holding of Invesco International Growth Fund as of Dec. 31, 2013) and more recently we have introduced a Thailand-based company into the portfolio.
Examining Asia’s challenges
The challenges in Asia have been well-documented: China’s growth deceleration, earnings expectations that are continually revised down, and compressed margins as companies are not able to pass on their cost pressures to their customers.
In addition, interest rates are rising across the region, and cost pressure remains persistent, with wage hikes continuing to take their toll on margins. Not to mention weakening currencies due to tapering in the US, which has resulted in some governments having to take action to limit current account deficits.
Overall, we believe it’s important to focus on the long-term outlook when assessing Asia. The positive trends I’ve outlined above are encouraging enough for us to remain optimistic about the region.
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