Since March this year the Asia Pacific markets have rallied strongly, as investors anticipated that loose monetary policy and government stimulus packages would be enough to trigger a recovery.
The MSCI Asia Pacific ex Japan Index rose by 7.2% in sterling terms over the last 12 months
to 31 July, outperforming the MSCI World Index which dropped by 6.3%.
Of the major Asia Pacific markets, China and India performed strongly. China benefited from economic recovery driven by government-directed bank lending, while in India investors responded very positively to better than expected performance by the Congress Party in elections.
The smaller markets of Indonesia and Thailand outperformed as they rallied strongly on the return of risk appetite in the second half of the period. South Korea was a significant laggard as the market was negatively influenced by a nuclear explosion and missile tests by North Korea and subdued demand for technology products.
The Chinese economy is likely to remain a dynamo for the region, growing at rates well above Western economies for a number of years. High levels of economic growth offer companies in China the opportunity to boost sales and profits considerably. China has a vast amount of domestic savings earning low rates of interest. Some of this should be invested into domestic and regional stock markets, underpinning equity valuations in the region over the long term.
Long-term positives for the wider asset class include positive demographic trends in countries such as India, which should contribute to a major expansion of consumer markets. A further positive is the entrepreneurial culture which is firmly entrenched across the region. We are finding many high quality companies with excellent management and strong business franchises focused on shareholder value.
We continue to maintain a very conservative stance, believing there is little upside at current valuations. Markets are discounting a rapid return to the favourable conditions of strong global economic growth prevailing before the recent financial crisis.
However, they are not anticipating the possibility of a substantial pick-up in inflation as a result of quantitative easing. The extent and pace of the market rebound since March has been astonishing and a further correction over the summer seems likely.
We believe that investment in Asian companies, which offer quality in terms of management, business franchise and financial structure, will deliver positive returns over the long term.
Alistair Thompson is deputy head of Asia at First State Investments
