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					Asia – The re-rating continues
“What’s been driving Asia’s re-rating and
can this continue?”


Greg Kuhnert
Fund Manager


Investec Asset Management


March 2007
Outline


● Macroeconomics – structural growth


● Governance is improving


● Valuations


● The Risks




Page 2 | 00171
Macroeconomics – structural
growth
Macroeconomics




       GDP       =      C    +   I   +   G   +   (X – M)



C = Consumption
I = Investment
G = Government expenditure
(X – M) = Net exports




Page 4 | 00171
What’s driving the re-rating?


● Exports: Global outsourcing continues
● Rise in consumerism
● Investment needs to rise
● Rising Asian wealth and savings
● Improved macroeconomic stability




Page 5 | 00171
Global outsourcing continues…

Manufacturing wages, $ per hour                                                        Chinese share of US sea imports       Outsourcing from Europe to catch up
                                                                                                                             with USA
    Index US=100, ($23.17)

    140
          Average hourly compensation costs of mfg workers: 2004


    120




    100




     80




     60




                                                                                                                Automotive
                                                                                                    Machinery
     40




     20




      0
             US         China   India     Brazil    Mexico    EU-15   Japan   Asian
          US China                      Brazil                                Asia
                                                                              NIE's*




* Includes Hong Kong, Korea, Singapore, and Taiwan. Source: “China: Is the outsourcing party over? Part                      Source: Eurostat, US Census Bureau, UBS
Source: National sources, Morgan Stanley Research           II”, UBS, 20 September 2005


●         Outsourcing driven by Chinese entry to WTO in 2001 (and low wages)
●         Further growth from higher value added products (e.g. automotive and machinery)
●         Outsourcing from Europe in its infancy

Page 6 | 00171
Consumption

Real GDP growth ex Japan            % of Chinese disposable income    Gross household financial debt
and China                                                             1990 vs 2004




Source: CEIC, UBS estimates         Source: CSFB research             Source: CEIC, UBS estimates



●     Consumption as % GDP is low compared to historical
●     Savings (in cash) is high
●     Potential for emerging Asian consumers to leverage up further

Page 7 | 00171
Investment needs to rise

Gross investment share of GDP                                 Rising capacity utilisation rates


                                                                          85
                                                                          80
                                                                          75




                                                                %, 6mma
                                                                          70
                                                                          65
                                                                          60
                                                                          55
                                                                          50
                                                                               96     97    98   99      00     01   02      03      04   05     06
                                                                                    Korea             Taiw an             Thailand             Philippines




Source: CEIC, UBS estimates. Note: “Asian export economies”   Source: CEIC, HSBC
refers to Asia excluding Japan, China and India


●     Investment as a share of GDP is low
●     Ex China, capacity utilisation unsustainably high
●     Companies have capacity on their balance sheets
●     Regional infrastructure needs upgrading/expanding

Page 8 | 00171
Investment – examples

Government

 Name                               Total value     Country
 MRT train line extensions          $4.4 billion*   Taiwan
 Subway in Gwangju City             $1.7 billion    Korea


Private

 Name                               Total value     Country
 Powerchip and Elpida 12”           $0.48 billion   Taiwan
 Memory Fab
 Tangguh LNG Project                $5.5 billion    Indonesia
 Palm oil development               $5.5 billion    Indonesia
 (CNODC et al)

* Subject to legislative approval
Source: JP Morgan




Page 9 | 00171
Development of savings market


                                ●   Demographics point to rising dependency
                                    ratios by 2025


                                ●   Currently most savings in cash and bonds


                                ●   Asian wealth forecast to rise substantially


                                ●   Required increase in equity allocation is
                                    substantial




Page 10 | 00171
Improved macro-economic stability

Country                            As a % of GDP
                                                                        Different to 1998
                    FX reserves    Current account   CPI (yr on yr)
                    accumulation       balance
China                   9.6%            9.3%             1.6%           ● Current accounts are in surplus
South Korea             3.2%            0.1%             2.2%
Taiwan                  3.6%            5.8%             0.6%           ● Core inflation is moderate
Singapore               15%            24.5%               1%
Source: “Asian Economic Monitor”, UBS, Jan2007                          ● Currencies are undervalued
The Big Mac Index                   Price in USD       Under/over       ● Lower risk premia
                                                     valuation to the
                                                         dollar %

United States                           3.22                -
Britain                                 2.67             +21%
China                                   1.41             -56%
Hong Kong                               1.54             -52%
Indonesia                               1.75             -46%
Malaysia                                1.57             -51%
Philippines                             1.74             -46%
Singapore                               2.34             -27%
South Korea                             3.08              -4%
Source: The Economist


Page 11 | 00171
Governance is improving

● Political Change
● Corporate Governance
Political change


                  In the past…                     …now
China             ● Deng Xiaoping commences        ● Wen Jiabo and Hu Jintao
                    reform process                   assume leadership in smooth
                                                     transition
Hong Kong         ● British Rule                   ● Chinese rule – 1 country, 2
                                                     systems
Indonesia         ● President Suharto              ● 2004 – President Yudhoyono
                                                     the first elected by
                                                     independent vote
South Korea       ● General Chun Doo Hwan –           ● President Roh Moo-Hyun –
                    eventually jailed for 3 years for   human rights advocate
                    corruption
Malaysia          ● Dr Mahathir’s 22 year reign    ● Popular mandate to PM
                    commenced in 1981                Badawi and Anwar Ibrahim
                                                     released from jail
Taiwan            ● Martial Law                    ● Chen Shui-ban elected in
                                                     2000



Page 13 | 00171
Improving corporate governance


Type                     Example
Disposal of non-core     ● China Resources Enterprise
assets / restructuring   ● Hutchison Whampoa
                         ● China Overseas Land and Investment
                         ● Hong Kong and Singapore property REITS
Increasing dividend      ● Hong Kong Exchange & Clearing
payouts / special        ● Singapore Exchange
dividends
                         ● Digi.com
                         ● Taiwan Semi-conductor
                         ● Singapore Telecom
                         ● United Microelectronics
Improved disclosure / ● Venture Corporation, CNOOC, Kerry Properties and many others
Investor relations
Appointment of        ● SK Corp
Independent Directors

       Higher returns on equity = higher valuation multiples
Page 14 | 00171
Valuations
Scope for returns to rise through
gearing




Source: Goldman Sachs

                            Gearing levels are falling

Page 16 | 00171
Valuation levels are attractive…


                                                                                                        EPS growth                      Valuations are attractive on a price to book basis.
                                                                2006 PE                                 (2007/2008)
Asia ex Japan                                                       16.2                                          15%                               2.5
                                                                                                                                                                            PB                 ROE
                                                                                                                                                                                                                                                      16%

                                                                                                                                                    2.3
Developed World                                                     18.3                                          12%                                                                                                                                 14%
                                                                                                                                                    2.1
Source: UBS                                                                                                                                                                                                                                           12%
                                                                                                                                                    1.9
                                                                                                                                                                                                                                                      10%
                                                                                                                                                    1.7




                                                                                                                                                                                                                                                            ROE (%)
   35




                                                                                                                                           PB (x)
                          Asia ex-Jp - PE                       World - PE
   30                                                                                                                                               1.5                                                                                               8%

   25                                                                                                                                               1.3
                                                                                                                                                                                                                                                      6%
   20                                                                                                                                               1.1
                                                                                                                                                                                                                                                      4%
   15                                                                                                                                               0.9
                                                                                                                                                    0.7                                                                                               2%
   10
    5                                                                                                                                               0.5                                                                                               0%




                                                                                                                                                          May-97

                                                                                                                                                                   May-98

                                                                                                                                                                             May-99

                                                                                                                                                                                      May-00

                                                                                                                                                                                                May-01

                                                                                                                                                                                                         May-02

                                                                                                                                                                                                                  May-03

                                                                                                                                                                                                                           May-04

                                                                                                                                                                                                                                    May-05

                                                                                                                                                                                                                                             May-06
    0
        Jan-80

                 Jan-82

                            Jan-84

                                     Jan-86

                                              Jan-88

                                                       Jan-90

                                                                Jan-92

                                                                         Jan-94

                                                                                  Jan-96

                                                                                           Jan-98

                                                                                                    Jan-00

                                                                                                             Jan-02

                                                                                                                      Jan-04

                                                                                                                               Jan-06




Source: UBS                                                                                                                             Source: UBS




Page 17 | 00171
The Risks
The Risks


● Trade war with the US

● Hard landing in China

● Global risk aversion




Page 19 | 00171
Summary


● Asian re-rating driven by:
      − Structural growth
      − Improving governance

● Valuation still attractive relative to history and global equities




Page 20 | 00171
Contact information


Stephen Capon
Sales Manager
Tel: + 44 (0)207 597 2142
Email: stephen.capon@investecmail.com


Investec Asset Management
2 Gresham Street
London
EC2V 7QP
United Kingdom

www.investecfunds.co.uk



Telephone calls may be recorded to confirm your instructions
March 2007


Page 21 | 00171
Thank you

				
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