Asia – The re-rating continues “What’s been driving Asia’s re-rating and can this...
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Asia – The re-rating continues “What’s been driving Asia’s re- rating and can this continue?” Greg Kuhnert Fund Manager Investec Asset Management March 2007
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Transcript of Asia – The re-rating continues “What’s been driving Asia’s re-rating and can this...
Asia – The re-rating continues“What’s been driving Asia’s re-rating and can this continue?”
Greg KuhnertFund Manager
Investec Asset Management
March 2007
Page 2 | 00171
Outline
● Macroeconomics – structural growth
● Governance is improving
● Valuations
● The Risks
Macroeconomics – structural growth
Page 4 | 00171
Macroeconomics
C = Consumption
I = Investment
G = Government expenditure
(X – M) = Net exports
+GDP = C I G (X – M)+ +
Page 5 | 00171
What’s driving the re-rating?
● Exports: Global outsourcing continues
● Rise in consumerism
● Investment needs to rise
● Rising Asian wealth and savings
● Improved macroeconomic stability
Page 6 | 00171
Global outsourcing continues…
● Outsourcing driven by Chinese entry to WTO in 2001 (and low wages)
● Further growth from higher value added products (e.g. automotive and machinery)
● Outsourcing from Europe in its infancy
Manufacturing wages, $ per hour
* Includes Hong Kong, Korea, Singapore, and Taiwan. Source: National sources, Morgan Stanley Research
Chinese share of US sea imports
Source: “China: Is the outsourcing party over? Part II”, UBS, 20 September 2005
Outsourcing from Europe to catch up with USA
0
20
40
60
80
100
120
140
US China India Brazil Mexico EU-15 Japan AsianNIE's*
Average hourly compensation costs of mfg workers: 2004
Index US=100, ($23.17)
Source: Eurostat, US Census Bureau, UBS
US China AsiaBrazil
Mac
hine
ry
Aut
omot
ive
Page 7 | 00171
% of Chinese disposable income
Source: CSFB research
Consumption
● Consumption as % GDP is low compared to historical
● Savings (in cash) is high
● Potential for emerging Asian consumers to leverage up further
Gross household financial debt1990 vs 2004
Source: CEIC, UBS estimatesSource: CEIC, UBS estimates
Real GDP growth ex Japanand China
Page 8 | 00171
Source: CEIC, HSBC
50
55
60
65
70
75
80
85
96 97 98 99 00 01 02 03 04 05 06
%, 6
mm
a
Korea Taiw an Thailand Philippines
Investment needs to rise
● Investment as a share of GDP is low
● Ex China, capacity utilisation unsustainably high
● Companies have capacity on their balance sheets
● Regional infrastructure needs upgrading/expanding
Rising capacity utilisation ratesGross investment share of GDP
Source: CEIC, UBS estimates. Note: “Asian export economies” refers to Asia excluding Japan, China and India
Page 9 | 00171
Investment – examples
Name Total value Country
MRT train line extensions $4.4 billion* Taiwan
Subway in Gwangju City $1.7 billion Korea
Government
Name Total value Country
Powerchip and Elpida 12” Memory Fab
$0.48 billion Taiwan
Tangguh LNG Project $5.5 billion Indonesia
Palm oil development (CNODC et al)
$5.5 billion Indonesia
Private
* Subject to legislative approvalSource: JP Morgan
Page 10 | 00171
● Demographics point to rising dependency ratios by 2025
● Currently most savings in cash and bonds
● Asian wealth forecast to rise substantially
● Required increase in equity allocation is substantial
Development of savings market
Page 11 | 00171
● Current accounts are in surplus
● Core inflation is moderate
● Currencies are undervalued
● Lower risk premia
Improved macro-economic stability
Source: The Economist
Different to 1998Country As a % of GDP
FX reservesaccumulation
Current account balance
CPI (yr on yr)
China 9.6% 9.3% 1.6%
South Korea 3.2% 0.1% 2.2%
Taiwan 3.6% 5.8% 0.6%
Singapore 15% 24.5% 1%
The Big Mac Index Price in USD Under/over valuation to the
dollar %
United States 3.22 -
Britain 2.67 +21%
China 1.41 -56%
Hong Kong 1.54 -52%
Indonesia 1.75 -46%
Malaysia 1.57 -51%
Philippines 1.74 -46%
Singapore 2.34 -27%
South Korea 3.08 -4%
Source: “Asian Economic Monitor”, UBS, Jan2007
Governance is improving
● Political Change
● Corporate Governance
Page 13 | 00171
In the past… …now
China ● Deng Xiaoping commences reform process
● Wen Jiabo and Hu Jintao assume leadership in smooth transition
Hong Kong ● British Rule ● Chinese rule – 1 country, 2 systems
Indonesia ● President Suharto ● 2004 – President Yudhoyono the first elected by independent vote
South Korea ● General Chun Doo Hwan – eventually jailed for 3 years for corruption
● President Roh Moo-Hyun – human rights advocate
Malaysia ● Dr Mahathir’s 22 year reign commenced in 1981
● Popular mandate to PM Badawi and Anwar Ibrahim released from jail
Taiwan ● Martial Law ● Chen Shui-ban elected in 2000
Political change
Page 14 | 00171
Improving corporate governance
Higher returns on equity = higher valuation multiples
Type Example
Disposal of non-core assets / restructuring
● China Resources Enterprise
● Hutchison Whampoa
● China Overseas Land and Investment
● Hong Kong and Singapore property REITS
Increasing dividend payouts / special dividends
● Hong Kong Exchange & Clearing
● Singapore Exchange
● Digi.com
● Taiwan Semi-conductor
● Singapore Telecom
● United Microelectronics
Improved disclosure / Investor relations
● Venture Corporation, CNOOC, Kerry Properties and many others
Appointment of Independent Directors
● SK Corp
Valuations
Page 16 | 00171
Scope for returns to rise through gearing
Source: Goldman Sachs
Gearing levels are falling
Page 17 | 00171
0
5
10
15
20
25
30
35
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Asia ex-Jp - PE World - PE
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
May
-97
May
-98
May
-99
May
-00
May
-01
May
-02
May
-03
May
-04
May
-05
May
-06
PB
(x)
0%
2%
4%
6%
8%
10%
12%
14%
16%
RO
E (%
)
PB ROE
Valuation levels are attractive…
Valuations are attractive on a price to book basis.
Source: UBS
2006 PEEPS growth (2007/2008)
Asia ex Japan 16.2 15%
Developed World 18.3 12%
Source: UBSSource: UBS
The Risks
Page 19 | 00171
The Risks
● Trade war with the US
● Hard landing in China
● Global risk aversion
Page 20 | 00171
Summary
● Asian re-rating driven by:
− Structural growth
− Improving governance
● Valuation still attractive relative to history and global equities
Page 21 | 00171
Telephone calls may be recorded to confirm your instructions
March 2007
Contact information
Stephen Capon
Sales Manager
Tel: + 44 (0)207 597 2142Email: [email protected]
Investec Asset Management2 Gresham StreetLondonEC2V 7QPUnited Kingdom
www.investecfunds.co.uk
Thank you
