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en_asian_and_emerging_market_equities_highlights

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									                                       Conference call highlights
                                       July 2012



                                     Asian and Emerging Markets equities update
                                     Global concerns have led to a de-rating of Asian and emerging markets
                                     The last two years have been disappointing for Asian and emerging market investors.
                                     There are good reasons for that – many of them external to the regions concerned. For
                                     these markets, global growth matters. Economies in Asia and emerging markets have
                                     performed fairly well but the slowdown in developed economies, and in particular the
Vanessa Donegan
Head of EM and Asian                 problems in Europe, have caused investors to question the sustainability of emerging
Equities                             market growth and led them to take shelter in the US, which they feel is a safer home for
                                     their money.
                                     China has also made investors nervous
                                     Chinese policymakers are now paying the price for the stimulus they enacted in 2009 after
                                     the financial crisis. After letting investment, credit and property prices grow too quickly,
                                     policymakers have found themselves needing to tighten policy into the global slowdown
                                     and now face a delicate balancing act between fostering growth and preventing an asset
                                     bubble. Our expectation is that China‟s economic growth should bottom out this quarter
                                     before reaccelerating gently in response to the authorities‟ recent more accommodative
                                     policy stance.
                                     Falling inflation is supportive
                                     It is by no means all bad news, however, for Asian and emerging markets. Inflationary
                                     pressures are certainly moderating – both in China and across Asian and emerging
                                     markets as a whole. Prices of metals and energy have fallen sharply in the past three
                                     months. This supports profit margins and is good news for consumption, especially in
                                     those countries where consumers spend a disproportionate amount of their incomes on
                                     food and oil. It is also good for net importers of energy, such as India, as it should help
                                     narrow the current account deficit. Falling inflation is important for these economies
                                     because, when combined with below-trend growth, as we have at present, it allows central
                                     banks increased scope to loosen monetary policy and support growth.
                                     Commodity producers could suffer
                                     The corollary of the fall in commodity price inflation is that producer countries experience
                                     deterioration in their terms of trade. This is a particular concern for Brazil, where we are
                                     concerned that the government is focusing too much of its policy attention on stimulating
                                     consumption and not enough on structural reforms to ensure competitiveness.
                                     Valuations reflect negative views
                                     Emerging markets often behave as a beta play on investors‟ risk appetite. The
                                     predominance of „risk off‟ mode since the escalation of the eurozone crisis has caused
                                     Asian and emerging markets to be de-rated. As a result, Asian markets offer good value
 “Asian and                          in absolute terms, relative to their own history and relative to the US market, trading on a
 emerging                            price/earnings (PE) ratio of 11x earnings and price/book (PB) ratio of 1.4x. The same can
 markets have                        be said of emerging markets, which are undervalued relative both to history and
 become                              developed markets, trading on a PE of 9.5x and a PB of 1.5x.
 oversold and
 offer investors                     Banks offer alternative consumer exposure
 attractive                          The gloss has come off the performance of the well-owned consumer sector in emerging
 value”                              markets this year as companies have failed to beat elevated expectations.       One


   Issued July 2012 | Valid to end October 2012                           Page 1 of 2          For investment professional use only
                                  consumer-related area where we remain selectively optimistic is the banking sector. We
                                  like Asian banks that do not have exposure to Europe‟s problems and are operating in
                                  under-penetrated markets like Thailand, Indonesia and India. The strongly capitalised
                                  local banks in Singapore are benefiting from the exit of European players from the trade
                                  financing arena. We also like Bank of China Hong Kong as a key provider of funding in
                                  the growing offshore renminbi market, as well as Australian lender NAB, whose 8%
                                  dividend yield is higher than its PE ratio.
                                  Technology theme is also compelling
                                  The under-penetration of smartphones is a theme that overlaps both Asian and emerging
                                  markets. In addition, the proliferation of new products from Apple in particular is sustaining
                                  volume growth for Asian companies that are linked into the Apple supply chain. Asia also
                                  has its own leader in consumer electronics – Samsung Electronics – which is gaining
                                  share in areas such as smartphones and is competing well with Apple. Samsung
                                  Electronics is our largest holding and biggest overweight position.
                                  Summary
                                  The existence of strong trade linkages means that Asian and emerging economies cannot
                                  escape the deleveraging taking place in developed markets and their stock markets tend
                                  to become more correlated with global markets on the downside. As a beta play on global
                                  risk appetite, these markets can sometimes become divorced from local fundamentals.
                                  That can, however, present opportunities that we can capture. The current crisis in Europe
                                  has led the markets to adopt a more pessimistic outlook for global growth and the cyclical
                                  sectors across Asia Pac and GEMs are pricing in a scenario in many cases almost as bad
                                  as occurred in the second half of 2008. Any stabilisation of the outlook for China‟s growth
                                  could cause a snapback. While investors remain focused on macro risks, valuations of
                                  these markets are looking increasingly attractive – the dividend yield on offer on both the
                                  MSCI AC Asia Pacific Index and the MSCI Global Emerging Markets Index is running in
                                  excess of 3% for 2012.




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Issued July 2012 | Valid to end October 2012                                        Page 2 of 2                       For investment professional use only

								
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