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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. Macroeconomics – structural growth .

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asia the re rating continues what s been driving asia s re rating and can this continue

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
Outline
  • Macroeconomics – structural growth
  • Governance is improving
  • Valuations
  • The Risks
macroeconomics
Macroeconomics
  • C = Consumption
  • I = Investment
  • G = Government expenditure
  • (X – M) = Net exports

GDP

C

I

G

(X – M)

=

+

+

+

what s driving the re rating
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
global outsourcing continues
Global outsourcing continues…
  • 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

Manufacturing wages, $ per hour

Chinese share of US sea imports

Outsourcing from Europe to catch up with USA

Machinery

Automotive

US

China

Brazil

Asia

* Includes Hong Kong, Korea, Singapore, and Taiwan.

Source: National sources, Morgan Stanley Research

Source: “China: Is the outsourcing party over? Part II”, UBS, 20 September 2005

Source: Eurostat, US Census Bureau, UBS

consumption

% of Chinese disposable income

Real GDP growth ex Japanand China

Source: CSFB research

Source: CEIC, UBS estimates

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

Gross household financial debt1990 vs 2004

Source: CEIC, UBS estimates

investment needs to rise

Source: CEIC, HSBC

Investment needs to rise
  • 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

Gross investment share of GDP

Rising capacity utilisation rates

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

investment examples
Investment – examples

Government

Private

* Subject to legislative approval

Source: JP Morgan

development of savings market
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
improved macro economic stability
Improved macro-economic stability

Different to 1998

  • Current accounts are in surplus
  • Core inflation is moderate
  • Currencies are undervalued
  • Lower risk premia

Source: “Asian Economic Monitor”, UBS, Jan2007

Source: The Economist

governance is improving

Governance is improving

Political Change

Corporate Governance

improving corporate governance
Improving corporate governance

Higher returns on equity = higher valuation multiples

scope for returns to rise through gearing
Scope for returns to rise through gearing

Source: Goldman Sachs

Gearing levels are falling

valuation levels are attractive

G:\Depts\Marketing\Presentations\Hamilton Brown Graphics\¬MASTER GSF\MASTER_Asian Equity Fund UK_Switz_US_SAm (Greg Kuhnert)\Evidence\ASIAN Equity Fund Charts.xls\Valu Chts

Valuation levels are attractive…

Valuations are attractive on a price to book basis.

Source: UBS

G:\Depts\Marketing\Presentations\Hamilton Brown Graphics\~Working documents\00171_Asia Edinburgh (G Kuhnert)\Copy of Asia PE vs World_SP.xls\Sheet1

Source: UBS

Source: UBS

the risks1
The Risks
  • Trade war with the US
  • Hard landing in China
  • Global risk aversion
summary
Summary
  • Asian re-rating driven by:
    • Structural growth
    • Improving governance
  • Valuation still attractive relative to history and global equities
contact information
Contact information
  • Stephen Capon
  • Sales Manager
  • Tel: + 44 (0)207 597 2142Email: stephen.capon@investecmail.com
  • Investec Asset Management2 Gresham StreetLondonEC2V 7QPUnited Kingdom
  • www.investecfunds.co.uk

Telephone calls may be recorded to confirm your instructions

March 2007