Do reforms in Asia spell new opportunities for investors?

14th October 2014

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Reform-minded governments across Asia are improving the case for investment in the region, BlackRock has claimed.

Andrew Swan, head of Asian fundamental equities at the fund group said that sweeping changes across the region are supporting the argument for investment, despite the fact low GDP rates and the difficulty of driving through economic changes has been seen by investors as hampering growth prospects.

In China, he said that a recent  rebound in the key services sector, central bank easing and government efforts to revive the stock market, suggest pessimism about the country’s growth rate is overdone.

In India, pro-business policy has dramatically improved the medium to long-term outlook for equities, he said. “The strength and speed of the country’s recovery could surprise many”.

Swan said: “A domino effect has seen the election of reform-minded governments who recognise how imperative growth is to keep their large, young populations employed and more financially secure. China started the process, India followed. Indonesia and Thailand are preparing to go down the same path.”

Key to this, he said, is encouraging businesses to be managed by entrepreneurs rather than government officials and moving away from traditional heavy industries towards service industries.

In addition to this, he added, the development of a more skilled workforce should help promote a consumption-led economy.

Swan said that many countries are addressing their vast infrastructure needs and these changes are helping to create a more stable and less volatile economic cycle.

China has put many investors off buying into the region as weak manufacturing data prompted fears of economic decline, but BlackRock said these concerns were overdone.

The government is also trying to revive its stock market by cutting trading fees and organising investor presentations from the biggest banks.

Swan said: “We believe China may be on the cusp of significant change, something akin to what we saw when it joined the World Trade Organisation in 2001. Back then, the market was trading at a similar multiple to today amid fears that joining the WTO would lead to unemployment in the agriculture sector.

“Those fears weren’t realised, and it triggered strong economic growth and equity market returns over the next five years.”

He said: “We believe there are fantastic returns to be gained from investing in some of the older, bloated state-owned enterprises (SOEs) as they adapt to a more commercial, competitive landscape by focusing much more on costs and cashflow or by transferring capital allocation decisions to the private sector.”

Meanwhile, in India, the new government under Narendra Modi and his BJP party has set in motion a series of policy initiatives designed to revive the government’s capital spending programme and ease bottlenecks, which should clear the way for improved private investment, he said.

“Ahead of the election, and as change appeared more likely, we moved into ‘reform beneficiaries’ like infrastructure and domestic cyclicals (notably steel, utilities and energy) and chose to underweight defensives and ‘quality’ stocks.

“These are companies that were out of favour and cheap. Since then the market has rallied very strongly, but there’s still value to be had and 70% of our Indian exposure remains in cyclical sectors.”

But Swan cautioned that, though he sees improvements in medium and longer term prospects, the fund group would not get carried away with “Modi mania”.

 

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