Pickiness should pay off in Asia
It has been another month of depressingly familiar headlines - ‘prepare for eurozone break-up’, ‘China’s growth under pressure, ‘‘fiscal cliff’ threatens America’s recovery’.
It has been another month of depressingly familiar headlines – ‘Prepare for eurozone break-up’, ‘China’s growth under pressure’, ‘‘Fiscal cliff’ threatens America’s recovery’.
Yet hope springs eternal that central banks will come to the rescue. Markets have rallied on expectations of policy action again.
Indeed, US equities have now gained more than 25 per cent from a year ago, while European stocks are up by more than 15 per cent. In comparison, markets in Asia have risen less than 5 per cent over the same period. At first sight, this seems odd. As we have argued before, the fundamentals in Asia, despite its slowing growth, are clearly superior. So why are they not doing better?
To be fair, the attractions of developed markets are not only about policy, big bet though that is. Some firms have been doing fine – profits are up, costs are under control and in the US, neither political party wants to alienate the corporate sector with higher taxes.
And then there is the debate about equities versus bonds. In the past couple of years, the unprecedented collapse of yields has fuelled bond market returns, while weaker earnings and growth prospects have constrained stockmarket gains, with equities now looking relatively and absolutely cheap.
But if that is true for the West, it is also true for Asia, where many multinational companies are making their money. Here interest rates too are coming down. Companies are throwing out cash and even buying counterparts overseas, including firms in the West.
Fifteen years ago this would have been unthinkable. At that time, many companies were borrowing heavily offshore to invest in what were often speculative and unproductive projects. When the Asian financial crisis struck and currencies plunged, the indebted companies struggled – and many collapsed.
Since then, Asian companies have in general become very prudent. Aside from higher standards of corporate governance, balance sheets have strengthened significantly. In the same vein, banking sectors have shown marked improvements thanks to extensive financial reforms. Non-performing loans have fallen. Risk management, and regulatory and supervisory oversight are stronger, too. In spite of this, Asia always gets a bad rap when global growth slows.
There is certainly a case for being selective. Which companies should I be buying today? The first and arguably most important consideration is balance sheets. How geared is the company? Are cashflows strong? Robust balance sheets not only enable companies to face near-term challenges. They also allow them to continue investing in the business so that they stay competitive.