Hong Kong: Stocks focused on domestic Asian themes, such as consumption and properties, are attractive investments in a region that is expected to outperform even as global growth slows.
Home to two of the world’s fastest growing economies -- China and India -- Asia is expected to weather the slowdown in world economic growth, analysts say, although all bets are off in the event of a U.S. recession.
That risk eased this week after the Federal Reserve cut its benchmark fed funds rate by 50 basis points to 4.75%, to help shield the world’s biggest economy, Asia’s top export destination, from a housing slump and credit market turmoil.
“This is obviously good news for Asia. Asian economies were already strong, stock valuations were not excessive, so a cut in U.S. interest rates is certainly a big boon for Asia,” said Elan Cohen, senior portfolio manager at JPMorgan Private Bank.
Cohen said equity markets in Taiwan, South Korea and Thailand were particularly attractive. “Those three, we feel, are attractive though not without political risks, but their valuations are cheap. In the case of Taiwan and Korea, they’re highly leveraged to the upside in technology.”
The three markets trade between 11 to 14 times 2007 earnings compared with 15-16 times for Asia excluding Japan. Morgan Stanley analyst Malcolm Wood believes Hong Kong and China offered better opportunities.
“Banks like Hang Seng Bank, which would give you good exposure to improving credit growth and the wealth management services in Hong Kong” are good buys, he said.
Wood also likes Hong Kong property developers like Sun Hung Kai Properties, which has exposure to China’s thriving property market and Shun Tak Holdings which is benefiting from an economic boom in the the gambling enclave of Macau.
Firms well placed to take advantage of the growing buying power of Asian consumers include South Korean retailer Shinsegae -- rated a buy by Goldman Sachs analysts -- and New World Department Store China, which has been given an overweight rating by HSBC.
Earlier this week, the Asian Development Bank raised its growth forecast for Asia excluding Japan to 8.2% for 2008, up from an earlier prediction of 7.6%, but left open the possibility of downward revisions due to the global credit problem.
In contrast, the International Monetary Fund is expected to cut its forecast for 2008 economic growth in the United States to 2.2% from 2.8% and make a more modest reduction in its outlook for the euro zone.
But some market players remained cautious about rushing out to buy exporters and financial stocks, which had rebounded following the hefty U.S. rate cut.
“The immediate market impact of the U.S. rate cut is positive, although it’s too early to say whether or not the fundamental view on exporters from the region and financial stocks has altered,” said Hong Kong-based Mark Konyn, chief executive, Asia Pacific, of Allianz’s RCM asset management unit.
“There will be further disclosures relating to the failing asset class over the next month or so -- Lehman’s disclosure was better than expected, but let’s see others as they report.”
Lehman Brothers posted a better-than-expected 3.2% fall in quarterly earnings on Tuesday and said the worst of the credit correction was over, but Morgan Stanley missed expectations.