Skip to the content

Why this isn’t another Asian crisis, according to EM experts

03 September 2015

Henderson’s Michael Kerley and Ashmore’s Jan Dehn explain why the recent sell-off in Asia does not indicate turmoil reminiscent to the region’s financial crisis in 1997.

By Lauren Mason,

Reporter, FE Trustnet

There is no crisis in China, emerging markets or Asia despite gloomy portrayals in the media, according to Henderson’s Michael Kerley.

The fund manager, who runs the Henderson Asian Dividend Income fund, says the Asian economy is far stronger than it has been in previous years and that volatility in the market should not be a reason to sell out of the region.

“This is a lot of noise and a lot of market movement but, to be honest, someone described it to me as a murder without a body. We’ve seen the crime but there is absolutely no evidence as to why is has happened in the first place, at all,” he said.

Firstly, he argues that valuations in the region are attractive, both compared to its own historic valuations and relative to other markets.

Price-to-book valuations of the MSCI Asia ex Japan index suggests that investors are expecting the region to be hit by recession but Kerley believes that this simply is not the case.

“I don’t see a recession in Asia. I think we could have a recession globally, maybe, but I don’t think that is what many people are predicting at this point,” he said.

However, the manager adds that the price/earnings (P/E) ratio of the MSCI Asia ex Japan index is significantly lower than the relative P/E of the rest of the world.

The below graph shows that the region’s P/E ratio has plummeted since 2007 and has dropped to levels not seen since 2004.

Index vs world relative P/E since December 2003

Source: Henderson Global Investors

“They’re neither high nor low relative to history – they’re kind of sitting at around average. But relative to the rest of the world, despite the fact that you could argue a lot of problems that have taken place globally have not been Asia’s making, the relative value of Asia Pacific compared to the rest of the world is the lowest it has been for years,” Kerley pointed out.

“There are lots of reasons for that – QE has done risk assets no favours whatsoever, unconventional monetary policy has seen an allocation of capital to areas that nobody would have expected five years ago.”

“We have a slowing UK economy and US economy and virtually no recovery in those markets, yet they’re exhibiting record stock market levels and record property prices. Is that a combination we foresaw five or six years ago? I suspect not.”

The manager believes that a combination of low interest rates and excess liquidity has found its way into asset prices globally, which has favoured defensive assets in global equity markets over riskier assets.


 “We have this undervaluation but every time we have a little scare or a little shock, it’s emerging markets that seem to take it right on the nose,” he added.

Jan Dehn, head of research at Ashmore, agrees that talk of emerging market crises is usually an easy sell with investors despite vast improvements in the region’s fundamentals over the years.

“Ask 100 randomly chosen people and the odds are that 99 of them will still tell you that emerging markets are a collection of fragile tin-pot dictatorships whose economic survival hinge on commodity prices and unreliable funding from overseas speculators,” he said.

“Such views survive, stamped on the collective mind of the conservative finance industry despite the fact that they are a couple of decades out of date. Perceptions change slowly.”

Kerley points out that Asia is far healthier than it was in 2007 or during the Asian financial crash of 1997.

According to research from Henderson, Asian markets generally had a far greater loan-to-deposit ratio in 1997, which increases liquidity risk. Not only this, a significantly larger number of Asian regions within emerging markets had a current account deficit compared to now.

Loan-to-deposit ratio vs current account as a GDP percentage of emerging markets

Source: Henderson Global Investors

“If you look at 2007, generally everything is better than it was in 1997. But then you look at it now and the amount of reliance on funding and sensitivity to global interest rates is much less than it was back in either of those two periods,” the manager continued.

“Everyone talks about emerging markets and Asia gets dragged in with that but I think most of the vulnerability to what you’re seeing at the moment is really an emerging markets ex Asia problem, not really an Asia problem.”

The manager added: “Basically all the Latin American and a lot of the Eastern European countries are exporters of commodities, whereas most of the Asian countries are net importers.”

“You look at volatility in currencies and, although we’ve seen a lot of moves in Asian currencies, they’re quite small relative to what we’ve seen when you look at what’s happened with eastern Europe and Latin America.”

Dehn believes that the economic statistics across emerging markets in general are also far more promising than many investors assume them to be, and argues that there have been numerous improvements since the crash of 1997.


 “It is important to recognise that emerging markets’ current account positions are stronger, FX reserve coverage relative to short-term debt and imports are better, domestic credit growth is less rapid, while banks are far better capitalised, particularly in Asia. The fall in oil prices over the past year has been good for most emerging market countries, notably in Asia and eastern Europe,” he said.

However, for investors who are nervous on emerging markets and particularly Asia, Kerley believes that the best way to build resilience in a portfolio is to seek dividend growth for support, as dividends in Asia ex Japan on average have been cut by only 1.5 per cent whereas markets have fallen by around 10 per cent in the last month.

“I actually think dividend growth in Asia will outstrip earnings growth over the next five years. I think it’s possible we could see double the dividend growth,” Kerley said.

Currently, Henderson Asian Dividend Income yields 5.8 per cent and has outperformed its sector average by 4.32 percentage points over five years, providing a return of 14.84 per cent.

Performance of fund vs sector over 5yrs

Source: FE Analytics

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.