As President Obama wrapped up his trip to Southeast Asia, we thought it was a good opportunity to update you on some Asian markets we have the most positive outlook on: China/Hong Kong, Indonesia and Singapore.
China and Hong Kong have been laggards so far this year but we remain bullish. Government policies in 2010 were targeted to slow the economy, but next year’s policies should cause less friction to China’s growth trajectory.
The 12th Five Year Plan, scheduled to roll out in March 2011, is expected to focus on transitioning China from an investment-driven economy to a consumption-driven one. This means further urbanizing the country’s interior and improving its energy efficiency.
Markets in both China and Hong Kong are also relatively inexpensive, with the price-to-earnings ratios (P/E) roughly 15 times future estimated earnings. In addition, these markets have strong liquidity compared to peers and are logical destinations for fund flows as investors add more Asian influence to their portfolios.
Indonesia got out of the gate quickly in 2010 and has remained one of the world’s best-performing markets for the year, up nearly 53 percent in U.S. dollar terms in 2010.
This strong performance has pushed the P/E of the Jakarta equity markets up from 13.5 times earnings in August to 18 times forward earnings currently. This is relatively high compared with other emerging markets—the MSCI Emerging Market Index is trading at 14.7 times and the MSCI BRIC Index is trading at 13.5 times earnings.
However, the fundamental drivers of Indonesia’s market are strong and China can look to Indonesia as a blueprint for building domestic consumption.
The country’s strong balance sheet—very little leverage—and healthy urbanization trend has led to increased demand for the country’s rich natural resources. This has driven growth while insulating Indonesia’s economy from external volatility.
This year’s performance has attracted more investment capital, but that’s just the tip of the iceberg. The government’s efforts to de-risk Indonesia’s balance sheet could pay off with an investment-grade rating for the country next year, setting off another wave of investment flows.
Singapore gets excellent marks for business development and employment. Employment opportunities are rising and personal income tax rates have been declining, an ideal situation for increased domestic consumption.
The city-state has one of the lowest corporate tax rates in Asia, 17 percent versus 25 percent in both China and Indonesia. Hong Kong’s is roughly the same at 16.5 percent. In addition, Singapore has been generous in giving tax incentives to select industries.
We expect more companies to establish or expand their presence in this city-state.
The MSCI Emerging Markets Index (NYSEARCA:EEM) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI BRIC Index (NYSEARCA:BKF) is a free float-adjusted market capitalization index that is designed to measure equity performance of Brazil, Russia, China and India.
Disclosure: Long positions in Indonesia, China and Singapore