Asia Markets Are Cheap - A View from Hong Kong

Comments from Jay Roberts, Portfolio Advisor with RBC’s International Advisory Group in Hong Kong:

• The market is expecting earnings to be terrible in Japan and Taiwan this year. Taiwan as a tech-heavy export-centred economy has been particularly hard hit by the global downturn, especially as it sits at the front of the supply chain in technology. But it is Japan which is the real shocker: the market is forecasting that aggregate earnings will also be wiped out in 2009, down -90%. Note that although earnings are forecast to rebound in Japan in 2010 by +263%, this is from an extremely small base. (I.e. earnings at $10, down 90% to $1, up +260% to $3.6 still leaves you down considerably.) The situation in Taiwan has improved a little in recent weeks, but not enough to establish a trend.

• The good side to this - if there is a good side - is that ugly forecasts should - and have - led to ugly equity valuations. With the market now looking increasingly into 2010 numbers, a number of regional markets trade at single-digit earnings multiples. Notably, this includes China and India, two of the only markets where earnings are still forecast to grow marginally in 2009. Also, would note that Hong Kong equities are trading at 0.9x 2009 book value on consensus estimates, while some research houses put the figure even lower. Real estate in HK has been trading at about 0.6x BV, which is lower than during SARS when the city practically emptied out. In contrast this time, expat flows remained surprisingly solid in 2008. Let’s see what happens to HR flows in 2009.

• Korea is also an interesting example. The market is forecasting a downturn in earnings of “only” -2% in 2009, while Korean equities and the Won have both been battered.

• So, equities are “cheap”. That’s no secret. But equities can stay cheap and can get cheaper still. Investors still need to see some positive change in leading indicators, such as we have seen in the Chinese PMI. However, global - and particular Western - leading indicators are still not moving favourably. China can support itself to some extent due its superior fiscal position, low debt / GDP ratio, high savings rate and FX reserves. But it is highly questionable if China can stimulate end-user demand in the rest of the global economy.

• In short, China looks relatively well positioned - although stress on the word “relative”. It is one of the few Asian economies with enough fiscal firepower to really make a difference to economic output in 2009. While exports have been hit very hard, internal demand appears to be holding up. We’ve seen this over the past few weeks, with decent - or even strong numbers - coming out of a number of mass-market oriented consumer plays. “