5th August 2011
On Friday, the rout in global equities continued in Asia, leaving us in a situation whereby every major market in the world is now in the red.
The recent sharp correction in equity markets has been driven by heightened concerns over the outlook for economic growth in the developed world following a run of weak economic data.
At the same time, the debate over the extension of the US debt ceiling and the on-going problems in the European sovereign debt markets have raised the likelihood of more aggressive fiscal tightening across Europe and the US.
Asian markets had already de-rated this year, trading sideways despite fairly robust earnings growth. As a result, valuations – even before this week's sell off – were slightly below long-term averages, pricing in a degree of caution over the outlook.
We continue to think that Asian balance sheets – government, corporate and household – remain in good health in most economies.
The region, therefore, does not face the same structural headwinds from fiscal tightening and de-leveraging that are proving so painful in the US and Europe.
After more than 12 months of policy tightening, China retains considerable policy flexibility to stimulate growth should momentum slow sharply from here.
But no one is immune.
Given the considerable trade and financial linkages, Asia is not immune from the slowdown in growth taking place in the West.
However, Asian economies have been increasingly driven by structural domestic factors, including consumption, and these drivers remain in place.
Given this more positive long-term outlook for the region – and the now more depressed multiples – we are starting to see more attractive bottom-up value emerge.
We have had a fairly cautious view on the medium-term outlook for global growth for some time and our portfolios are positioned fairly defensively.
Our focus for some time has been on stocks that are less exposed to weakness in global growth. We target bottom-up ideas where our analysts have strongest conviction and where the risk/reward profile in valuations is attractive.
Our preference for some time has been for companies exposed to domestic demand. We are paying particular attention to the financial strength of businesses in the region and their ability to cope with any disruptions in the banking system that could re-emerge.
On the back of this week's events, we will look to take advantage of the stock-specific opportunities that will arise as preferred names are sold off indiscriminately in current markets.
Sign up for our free email newsletter here, for your chance to win an iPad 2.