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22 | International investment
consumer staples will continue to demonstrate
resilient characteristics, there is a strong case for
favouring consumer discretionary companies as Thus Asian domestic consumption is
they now offer superior value. Consumer stocks
are now incredibly cheap and have the potential
to surprise on the upside. likely to remain robust and is not
Cash is king
Following the wave of new listings, many con- suffering the type of collapse that we
sumer firms generated large cash reserves that
have yet to be deployed. In many cases these
companies have net cash equal to half or more have seen elsewhere in the world
of their market capitalisation. And many small
to medium-sized companies trade close to the all elements required to meet key stock picking with sub-par speed. This has resulted in signifi-
value of the net cash they have on their balance criteria for the sector, and they are clearly evi- cant bottlenecks and inefficiencies. Better and
sheet. The ability to generate strong free cash- dent in a number of companies within the faster railway networks in China will facilitate
flow to weather the economic downturn cannot investment universe. the flow of people and goods, accelerating the
be underestimated. Although consumer sentiment is going to take pace of urbanisation and improving economic
a hit amidst the global financial crisis, once the prospects. Other projects are focused on
Government policy panic subsides we believe the fundamentals for improving China’s road system, ports, airports,
We expect the Chinese Government to Asian consumer spending will improve sooner power grids and the provision of low-cost hous-
announce another fiscal stimulus programme than many commentators think. Domestic ing.
that will be more directed at the consumer. At demand within the Asia Pacific region is likely to In India, a similar story is evident where the
the same time China’s US$586 billion fiscal remain strong. Government has set ambitious targets to almost
stimulus package announced last November, to double investment in infrastructure over the
be spent on housing, infrastructure and post- Asian infrastructure sector next five years. It is financing the construction of
earthquake reconstruction, will also indirectly The global downturn and the resulting impact a variety of infrastructure projects including the
benefit the consumer. Asian central banks not on private sector capital expenditure may have modernisation of secondary airports, adding
only have strong FX reserves but also some severely impacted Asian export potential. electricity generating capacity and ports-related
room for monetary easing which puts them in a However, one should not underestimate the developments. Indian infrastructure investments
strong position. scale of the public sector’s response to these are expected to total $3 billion in 2008 and are
developments. Asian governments have a lot of forecast to rise higher in 2009.
Favourable macro trends ammunition in their financial arsenals to stimu-
This is resulting in Asia re-inventing itself from late their domestic economies to prevent a deep- Infrastructure companies to
being the factory of the world to a consumer in er and longer recession. Stimulus packages benefit
its own right. With personal consumption much announced thus far – which include and are not The focus on public spending and the longer
lower in Asia than in the US, the role of the limited to China’s US$586 billion, Korea’s US$43 term nature of the fiscal stimulus packages give
Asian consumer will only get stronger. A combi- billion, Taiwan’s US$17 billion, Australia’s US$11 the sector a more visible and clearer revenue
nation of credit tightening over the past five billion, India’s US$9 billion and Indonesia’s growth outlook. Also, many companies in the
years and clever fiscal policy will continue to US$5 billion– contribute at least 2% to annual sector will enjoy a moderation of cost trends,
allow room for expansion. Given where markets GDP. which should result in margin expansion this
are today we believe that Asia’s consumer sector With much of the announced spending to be year. This is likely to contribute towards a more
will perform even better over the next 10 years invested in transportation construction, infra- defensive earnings growth profile for the sector.
than in the past decade when it delivered strong structure spending is the key avenue for govern- The Asian market unquestionably offers
returns with low volatility. ments seeking to pump-prime, create jobs and attractive entry points for investors. While the
As Asian economies mature, consumer spend- generate direct economic benefits. markets will continue to remain vulnerable to
ing will become more significant, particularly The Asia Pacific infrastructure is currently earnings disappointments and macro shocks,
against a backdrop of high household savings below global average in quality and capacity. Asian markets are offering attractive long-term
rates, favourable demographics and higher than Statistics have shown that the quality of infra- entry points for investors with a long-term
average economic growth. Urbanisation, partic- structure in the Asia Pacific region is below the investment horizon. Valuations for Asian mar-
ularly in China, is a key driver of consumer global average, largely attributable to under- kets have come down to attractive levels. We
growth. It is anticipated that the total urban spending in the emerging economies. For exam- believe the sell-off has mainly been sentiment-
population of China will almost double, from ple, the lack of a sufficient surface driven and is becoming irrational. Emerging
532 million in 2008 to 970 million in 2020. With transportation network in many Asian countries markets are now trading at a discount compared
towns and cities come shopping malls and forces them to rely heavily on shipping by sea, to developed markets, while growth is higher.
supermarkets, populated by a fast expanding pushing up the cost of moving goods. But the We believe this is likely to reverse as the irra-
middle class. The growing number of working current market conditions provide Asian coun- tional sell-off fades away gradually.
women in Asia will also drive consumer demand tries with a golden opportunity to take advan- Among the Asian countries, Mirae Asset
both in terms of increased spending power and tage of the commodity price correction to believes that China will remain the most attrac-
the range of products on offer. improve their infrastructure and boost long- tive market. It has resilient fundamentals, very
With this outlook in mind, the Asian con- term competitiveness. little debt, a fiscal surplus and the world’s second
sumer sector boasts many highly attractive stock One key focus of the Chinese stimulus pack- largest FX reserves (according to Bloomberg).
picking opportunities. Factors such as high cash age is railways. The railway network in China The market corrections offer a good opportuni-
generating capability, clear earnings streams, has long been underinvested, garnering one of ty for investors to buy quality Chinese compa-
optimal gearing and solid growth potential are the world’s lowest operating lengths per capita nies at low valuations.
May 2009 Investment International www.investmentinternational.com
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