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SE Asian Markets Have Been Overlooked February 8, 2002
While North Asian markets are the current favourites, investors should not overlooked opportunities in Southeast Asian markets.
Author : Wong Sui Jau

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( Market performances in Asia have been uneven since last year. Korea and Taiwan have been the best markets. The Korea composite index is up 51.77% since its low at the end of September and the Taiwan weighted index is up 62.98%. On the other hand, the Thai SET index is only up 25.5%, while the Malaysian Kuala Lumpur Composite Index is up only 14.9%, and Singapore's STI is only up 30.9%. The Southeast Asian markets may have been overlooked in light of the emphasis on North Asia markets.


As many signs are showing, the US is slowly coming out of recession. Instead of contracting, as was widely expected by economists, the US economy grew by 0.2% in the fourth quarter of 2001. Given that US accounts for a large part of exports from all Asian countries, all Asian countries would benefit from a recovery in the US. A BNP Paribus report ranked the Asian countries whose economies are most directly impacted by exports to US and how much that contributes to their economies. The top 5 in that order was Philippines, Malaysia, Hong Kong, Taiwan and Singapore. Korea came in seventh after Thailand.

As you can see, not just Taiwan, Korea, other markets like Malaysia, Singapore and Thailand will also be beneficiaries of a US recovery. The reason why the Korea and Taiwan markets have benefited the most is because the largest Taiwan and Korean stocks are electronics and chip stocks. These stocks are the first to benefit directly from a semiconductor recovery and thus have run up the most. However, in a recovery situation, it is not just electronic companies that will benefit and show growth again. Retail companies, banks, and other companies will also show growth when the various economies in these countries recover, and recover they will.


The broadest indication of where an economy is headed would be the GDP growth. While US is expected to recover this year, the US economy is forecast to grow by just some 0.7% to 1% in 2002. In contrast, Malaysia's economy is forecast to grow by 3%, Thailand's economy is forecast to grow by 2% and Singapore's economy, by 2 to 3%. Taiwan and Korea are expected to grow by 3% and 3.9% respectively.

While Korea is forecast to grow the most this year at almost 4%, the other Asian countries are not too far behind. The only reason why the Southeast Asian stock markets like Malaysia and Singapore have not risen as much as Taiwan and Korea is because there are less electronic companies in their stock markets. However, one would argue that the banks and retailers will also start to grow when the economy recovers. It is just that it will take slightly longer before the beneficial effects of the recovery in Asia to be felt. That, plus the fact that the North Asian markets are larger and are currently the subject of much interest have left Southeast Asian markets lagging. However, given that North Asian markets have already appreciated by so much, there is an opportunity to move into Southeast Asian markets in anticipation that they will eventually catch up with North Asian markets.


The valuations of companies in Southeast Asia are low when compared to their US counterparts. The US stock market has an average forecast P/E of around 22 times for 2002. Southeast Asian markets have P/Es several notches lower. The Singapore stock market has a forecast P/E ratio of about 17 times in 2002, Malaysia has a forecast P/E of 15 times, and Thailand 's is even lower at around 12 times for the year 2002. If Asian stock markets have better growth prospects than the US and are cheaper in terms of valuations, then when they do recover, the potential upswing will be higher than for US.

Consider how a market rises from a 15 times P/E valuation to a 20 times P/E valuation. Assuming that the average earnings of that market grows by just 10%, the market price index will rise by 83.33% in such a situation! Similarly, for a market that is already trading at 22 times P/E, if its companies' earnings grow by 10%, its price index will stay flat for it to trade at the same 20 times P/E. Asian markets thus have far more potential upside compared to US markets.


There are a few single country funds in South East Asia available for investors to consider. Many of these funds have outperformed their respective markets over the years. For example, almost all Singapore funds have outperformed the STI index in the year 2001 and over the last 3 to 5 years. Amongst Singapore funds, Aberdeen Singapore Equity Fund and Schroders Singapore Trust stand out especially in outperforming the STI index by more than 35% over the last 3 years. For Thailand, Aberdeen Thailand Equity Fund is a good choice. The fund rose 30% in the year 2001 making it one of the best-performing funds in 2001. For Malaysia, Aberdeen Malaysia Equity Fund is the only dedicated Malaysia fund available. It managed a return of 11.36% for the year 2001 and has a 3-year return of 44.56%. While conservative investors will stick to an Asia-ex-Japan fund, aggressive investors who remember how Korean funds rose by 60% in 3 months from their September lows may want to consider such individual country funds.

Wong Sui Jau (AFP, Senior Analyst and a licensed investment representative), is part of the Research and Editorial team at Pte Ltd.

All performance figures were derived by comparing bid to bid prices with dividends reinvested. No action should be taken without first viewing a fund's prospectus. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Please read our disclaimers.


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