Malaysia (up 14.7 %), Taiwan (13.7%) and South Korea (12.7%) have performed best. The worst markets have been Thailand (down 10.5%), the Philippines (down 1.8%) and China (down 1.5%).
Despite the relatively slow start to the year fund managers remain positive on the region. According to the latest Merrill Lynch survey of Pacific ex Japan managers a net 71% expect stronger economic growth over the next 12 months whi
le 76% expect better profits. A net 41% say the region’s shares are undervalued.
Much attention is focused on how the Chinese economy is likely to perform this year. After powering growth in the region last year, with a 9.1% rise in GDP, the Chinese authorities are trying to limit the rise to 7% in 2004. This is to avoid the danger of overheating and a subsequent “bust”.
One way such problems could manifest themselves is through rising inflation. So it is worrying that a net 70% of the region’s fund managers expect it to be higher in 12 months.
Inflation damage
Angus Tulloch, the head of global emerging markets and Asia Pacific at First State Investments, says: “A little bit of inflation would be good news.” Since until recently the fear was of deflation a shift to slowly rising prices could be positive. But if inflation got out of control it could cause economic damage.
The main mechanism for slowing the economy is by restricting bank lending. Back in September the authorities tightened the banks’ reserve requirements – the amount of capital banks have to hold relative to the value of their loans.
The authorities are also more generally trying to persuade the state-owned banking sector to lend less. But it is not always easy for the central authorities to control banks in the provinces. Mr Tulloch says: “The Chinese have a saying ‘the hills are high and the emperor is far away’”.
Elsewhere in the region there is some concern about the impeachment of President Roh Moo-hyun of Korea. But fund managers seem to see this as a short term glitch rather than indicating a longer term problem.
Elizabeth Desmond, a senior portfolio manager at Delaware International Advisers, says: “We would argue that this is part of a long term transition to democracy”. She says it may cause short term uncertainty but the transition will be beneficial overall.
Slight reversal
Thailand has also suffered a slight reversal after the market more than doubled last year. Investors seem concerned about the government’s handling of the avian flu epidemic and violence in the country’s mainly Muslim southern region.
Nevertheless such setbacks are generally seen as small compared with the overall growth potential of the region.
