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South Korea & Thailand: Best Value In Asia

88max

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July 11, 2008

South Korea & Thailand: Best Value In Asia

Ray Prasad, Senior Portfolio Manager of Batterymarch, a subsidiary of Legg Mason, opines that the outlook of Korean and Thai markets are the best among the Asia ex-Japan markets.

Author : Fundsupermart Editorial Team


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South Korea And Thailand: Best Value In Asia



While the United States falls into a mire of economic slowdown and inflation, fast growing China and India continue to support Asia as the region with the best long-term fundamentals. Ray Prasad, Senior Portfolio Manager of Batterymarch, a subsidiary of Legg Mason, opines that the outlook for the South Korean and Thai markets are the best in the Asia ex-Japan region.

South Korea: Attractive Valuation

Domestic demand makes up more than 50% of Korea's GDP. With the recent weakening of the Korean won, as well as the rocketing energy prices, there is widespread worry that consumer sentiment and domestic demand would be dampened.

Consumer confidence fell to 92.2 in May, from 100.4 in April, reaching its 3-year low, showing that people are generally feeling pessimistic about the future of the economy. In order to cushion the impact of inflation on the people's livelihood, the South Korean government said it will provide 10.5 trillion won (USD 10 billion) in tax rebates and 20,000 won in monthly oil subsidies for low-income earners.

On the other hand, the big-scale promotional sales by the department stores have also helped to lift household expenditures in May. South Korea's departmental store sales rose 11.3% yoy in May, the greatest leap in two years, which helped to alleviate the worries of a slowdown in domestic demand.

Led by President Lee Myung Bak, the Korean government has indeed been promoting domestic economic growth since he came into office. To spur economic growth, the government has not only proposed to cut corporate taxes and increase tax breaks for companies investing in research and development, but has also planned for numerous construction projects. According to Prasad, these projects would boost domestic demand and contribute to domestic growth.

In the face of a slowdown in the US , the Korean won has depreciated about 10% to 12% year-to-date (as at May 2008), which has enhanced the competitiveness of Korean exports. Nevertheless, Prasad pointed out that a slowdown in global growth is inevitable and the Korean won cannot continue to depreciate, because the Korean government will need to control rising inflation.

After the substantial correction in the first half of this year, the valuation of South Korean equities has become one of the cheapest in Asia. We should see some positive upside in the Korean equity market in the coming quarters, should the won re-appreciate and the proposed infrastructure projects lend a boost the economy. However, since export-related equities may suffer from the re-appreciation of the Korean won and a global economic slowdown, Prasad reminds investors to keep their eyes on more stable equities which could benefit from domestic demand.

Thailand: Impact of Politics is Limited

The anti-government protest which happened in late May in Bangkok, Thailand's capital, has brought further uncertainties to the political situation of Thailand. Investors' confidence over the economy was affected and the stock market dropped for five consecutive days. In face of the crisis, Thai Prime Minister Samak Sundaravej emphasized that he would neither resign nor dismiss the parliament, or clamp down on the demonstration using violent means.

Indeed, Thailand is not known for her political stability. There have been 18 military coups since Thailand ended its absolute rule by the monarchy in 1932. However, experience has shown that the impact of political turmoil over Thailand's economy is limited. Instead, changes in policy mattered more (e.g. the foreign exchange controls in 2000).

Prasad further mentioned that the Thai economy is doing well and is the only country in Asia where economic growth is going up. He projects that the economy will grow more than the 7% to 8% estimated by many analysts.

According to Prasad, the Thai government will not implement any measures that will rattle the market. He pointed out that the Thai government has learned from experience in the last couple of years and they realized that they need to provide a certain level of assurance (to investors), for stable economic and domestic growth to take place.

Meanwhile, the Fundsupermart research team believes that short-term political turmoil would inevitably be negative for the Thai equity markets; however, with its positive long-term potential, investors should focus not only on the current political situation, but on the long- term potential of the Thai economy.

China Economy to Take Off

The Chinese economy has been growing rapidly since the introduction of its Open Door Policy in 1978. According to Prasad, in terms of GDP per capita , the current scale of the Chinese economy is similar to that of the US was in the 1920s and 1930s. He suggested that the Chinese economy has achieved what the US took 60 to 70 years to do, and predicted that China will accomplish in the next 10 years, what the US achieved from 1930 to 1960/70s.

As explained by Prasad, the rapid urbanisation of Chinese society is the major driver of domestic and economic growth. Under the multiplier effect, he estimates that a mere urbanization rate of 1.5% every year in China would bring about a GDP growth of 6% to 8%. Currently, around 40% of China's population resides in urban areas. According to the State of World Population 2007 by the United Nations, China is undergoing a period of rapid urban expansion. Around 1% to 1.5% (i.e. 18 million) of the population has migrated from the rural to the urban areas. As urbanisation continues, income levels and consumption expenditures would increase. For instance, the disposable income of urban families has increased by 12.2% from 2006 to 13,786 yuan in 2007. Increase in income also promotes the growth of consumption. In 2007, the retail sales experienced a year-on-year rise of 17.2 % in urban areas and a 15.8% rise in rural areas, reaching 6.0411 trillion and 2.8799 trillion respectively.

Prasad points out that with an economic size of around US$3 trillion, a basic growth in GDP of 8% to 9 % in China would mean tens of billions of dollars in terms of growth in consumption in terms of US dollars. Furthermore, the Chinese government is striving to increase its economy's reliance on domestic demand. In the long term, the Chinese economy will transform from an export-oriented economy to a domestic-driven one. Therefore, he believes that in the medium to long term, the best sectors for investing in China would be the consumer goods and services sectors, such as the domestic financial services sector.

As for the fast-rising inflation in the mainland, Prasad believes that it is mainly due to the surging commodity prices, such as food prices. He expects that as food supply and GDP per capita increases, the proportion of food expenses to per capita expenditure would decrease, so the inflation situation could improve in the next 2 to 3 quarters. The Chinese market corrected significantly early this year, - although it is not as attractive as South Korea and Thailand in general, Prasad believes that it is a market with a positive long-term outlook.

Singapore and India Lack Attractiveness Now

The inflation problem is worse in India than in China. As suggested by Prasad, the situation in India today is similar to Latin America in the 1980s. The inflation is similar to a structural one, with not only commodities and foods under supply, but also power and capital goods facing supply deficit. Prasad believes that it's rather difficult for India to solve this supply problem in the short term.

On the other hand, the Indian central bank has raised the target rate to 8% to fight inflation; together with the increase in the reserve ratio, the liquidity levels of the corporations have already been tightened. Meanwhile, it is hard for the Indian government to promote growth by increasing public expenditure, due to the fiscal deficit. All in all, it is hard to say that the India economy would improve in the next two to three quarters.

As for Singapore, Prasad suggested that due to its nature as an open economy, Singapore is particularly vulnerable to external shocks. In addition, telecom and banking stocks make up a major portion of the Singapore equity markets. Despite the limited impact of inflation on these sectors, Prasad sees Singapore as an unattractive market, as it is one of the most expensive markets in the region, and growth is slowing down.

Limited Impact of US slowdown

Prasad believes that US equities has already reached their bottom, but it will still take some time before the equity markets pick up again. According to him, the US slowdown and inflation situation is a temporary phenomenon for the Asian equity markets. As long as the slowdown in the US is not very severe, Asia will be able to resume its growth trend again. Although there can be short-term fluctuations, fundamental drivers in the long term are positive in Asia. Therefore, any correction appears later may represent a good opportunity for value investors.
 

SammyHulk

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Best value in terms of investing or living there? if e latter imo dun think SK is a good choice but Thailand yes.:cool:
 

dysentry

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This ain't exactly the Meiji Restoration period of China. I don't see any flowering of innovation and civic progress amongst the Chinese or Indians.

In the long run IMHO China will fall back to its place in the hierarchy of nations.

If the whole of China lived like Americans this planet will be unsustainable.
 

storm

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I agree, SK is damn expensive! Imagine a simple lunch out will cost one USD$8. The cost of living in SK has increased to a level that even the native cannot tahan.
 
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