Eastern promise: high returns for high risk in a fast growing world

In the second of our emerging markets series,
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The Independent Online
Investing in emerging markets is relatively expensive compared with the UK because most emerging market trusts charge a 5 per cent fee up front and up to 1.5 per cent a year in management charges, but the rewards can be proportionately higher. Despite their sharp correction in 1994 and consolidation in 1995, total returns from South-east Asian stock markets were 143 per cent over the past five years compared with 86 per cent in the UK.

Economic growth is consistently faster than in the developed economies, investment opportunities are multiplying and valuations are at historically low levels. The combined market capitalisation of the eight main stock markets (including the "emerged" Hong Kong and Singapore markets) is equal to more than 60 per cent of the London market. Fund manager Fidelity says the number of quoted companies has increased to 13,000 last year from 5,000 in 1983 as new issues keep on coming.

Investment success, as always, depends on picking the right manager. Old Mutual Thailand, a single country unit trust, has doubled investors' money over three years and tripled it over five, according to Micropal, the funds analyst. Schroder Pacific Growth, a mainstream regional unit trust, produced 69 per cent gains over three years and 188 per cent over five.

Conversely, Micropal shows Credit Suisse Orient up just 24 per cent over three years and Lloyds Bank Pacific Basin ahead 68 per cent in five years, both beaten by the average of UK-based growth trusts, which grew by 40 per cent and 77 per cent over three and five years respectively.

The arguments for continuing to invest in South-east Asia hinge on superior economic growth and expanding consumer markets. The Asian Development Bank forecasts growth of 7.4 per cent this year and 7.1 per cent next, more than double that expected from the developed world. The growing purchasing power of domestic consumers is key - including China, the region has a population of more than 1.6 billion, almost 40 per cent of whom are under 20 years old. Asians save nearly 30 per cent of GDP, whereas the British tuck away 10 per cent.

Investors wanting to tap the Eastern promise have a wide variety of funds to choose from. At the high-risk end are country funds specialising in the less developed economies, principally China. Margaret Gadow, manager of Save & Prosper's China Dragon unit trust, says China is still a market only for the brave, even though it is looking more positive now than when the economy was overheating three years ago.

At the low-risk end are regional funds which include a large slice of Hong Kong and Singapore as well as still emerging Malaysia, Thailand, South Korea, Taiwan, Indonesia and the Philippines. The growing sophistication of stock markets in South-east Asia means massive disparities in value are a thing of the past, according to Peter Hames of Abtrust's Singapore office. "You could once buy Taiwan on a multiple of 100 times earnings, when Thai banks were only on four times earnings. Thai banks were seen as boring, yet they have done incredibly well," he says. Such bargains are now far rarer. The days of consistent 20 per cent increases in profits by Asian companies are coming to an end. "We have to look for good management and good products."

KC Lee, manager of Fidelity's Asian Values and South East Asia trusts, says the chances of getting into the wrong stocks increase as the list of quoted companies swells. With corporate cultures favouring equity over debt financing (except in Korea), a continued strong flow of listings and fund raisings is to be expected.

Mr Lee pays little attention to benchmarks or country allocations but relies on a labour-intensive stock-picking approach. Last year, his 22- strong research team held more than 1,500 company meetings. He favours companies with established track records of moderately rising and sustainable earnings. He avoids high-growth, high-multiple stocks and those in cyclical industries. He is having little do with China directly, but prefers to invest there via well managed Hong Kong companies.

Abtrust is also wary of China. Despite tremendous growth opportunities, Mr Hames says it is difficult to find companies of the right quality among the sprawling former state enterprises. However, China watchers point to an improving economic outlook as the austerity measures of July 1993 take effect. Inflation has more than halved to around 8 per cent and company valuations are looking reasonable again. Chinese blue chips listed in Hong Kong ("H" shares) are on multiples of 10.5 times earnings, Shanghai stocks are at 7.5 and the thinly traded Shenzhen stocks at 5.5. With a relaxation of monetary policy expected later this year, corporate earnings should recover.

Most China investors have been hard hit over the past two years and careful stock-picking is the key to future success rather than buying the "China story", says Stephanie Wu of Foreign & Colonial.

Ms Gadow of Save & Prosper accepts that such a young market has its problems - too few accountants and insufficient enforcement of stock market regulations - but information flows are improving and time is on its side.

Volatility - always a hazard in emerging markets - can be reduced through regular savings. Many unit and investment trusts accept contributions from as little as pounds 20 a month. Regular saving smooths the peaks and troughs of investing as more units or shares are bought when prices are low and fewer when prices are high.

Currency is less of a hazard. The Hong Kong dollar is pegged to the US currency and most other South-east Asian currencies stay in line to some degree. Currency appreciation in the long term is a potential reward of superior economic growth. The Singapore dollar has been likened to the Swiss franc.

As markets like Singapore and Hong Kong mature and relocate their factories across borders to lower-cost neighbours, so new ones emerge. Although the vast potential of China is expected to dominate the region for the foreseeable future, other former closed or communist countries are edging into the capitalist fold. Vietnam, Cambodia, Burma, Laos and Nepal may all one day have stock markets.

For the moment, though, the old markets are the best. Hong Kong is top of the value list for Mark Mobius, manager of Templeton Emerging Markets Investment Trust. He believes fears for the market under Chinese rule from next year are overdone. And he is buying.

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