Macro-economic opportunities in Asia

The end of the world is not that near. I have to say this because last week's space focused on the Barclays Gilt Report's first essay and the fact that growing populations are consuming natural resources at rates beyond our ability to replenish them.

Insights that created "end-of-the-world is nigh" billboards on my e-mail. In addition, the fact that major capital markets in both equities and debt are volatile and largely negative creates a doom and gloom backdrop. But not backdrops that will end the world soon.

Every cloud, as they say, has a silver lining. During such doomsday times there is a tendency for the stock-picker to outperform the stock market; the bottom-up guy "kicking the tyres" on specific selections, outperforming the top-down guy buying into trends.

Translated: Doomsday times do not mean that everyone is losing; it simply means an adjustment of management style away from "directional" trends towards "under the microscope" specific selection.

For this week's mentor analysis I've turned to Macquarie Research and their Asia Strategy suggestions in a paper titled Asia Strategy - Avoiding the Landmines. The title's give-away is that they see Asia with a number of downsides. Let's sweep through some of the downsides to focus on six positive "macro trades".

Downsides include weaker Asian exports, lower earnings with Taiwan and Korea (don't be swayed by the value trap of lower PEs) singled out for hits, Singapore and Malay-sia in negative thought, but "little effect" in China, Hong Kong, India and Thailand.

Not surprisingly, banks will be "challenged" (where aren't they?); with the major headlines being lower rates in Hong Kong, India, Korea, Philippines and Indonesia and low credit risk in Asia because of the ingrained debt intolerance.

Downsides apart, Macquarie believes that "Asia should be resilient". Four headlines make the point: as implied above, Asian companies have little debt. Second, government fin-ances are in good shape. Third, China will continue to grow and drag Asia with it. Finally, Asean domestic economies are very strong.

In fact, not just strong but durable. The report states "ASEAN growth is higher and becoming less volatile. The Sharpe ratio is rising. ASEAN is being driven domestically".

A major backdrop to this durability is ASEAN integrating into Chindia: "ASEAN is exporting primary goods to satisfy Chinese domestic demand. ASEAN exports to India are also growing rapidly from a small base".

So where are the upsides? Six selected opportunities are highlighted. First, Hong Kong property and banks. Having just been to HK, "it will be nice when it's finished", is like visiting the UAE, prices have been going up, when are they supposed to come down? For Macquarie, not yet: "The affordability starting point is excellent. At the same time employment growth and wages growth is picking up and interest rates are falling. Prices can go a lot higher before affordability becomes stretched".

Banks and property

The other "odd thing" about Macquarie's first choice is the "and banks" tip, "banks and property tend to move together, both in a price and a valuation sense. But a gap has opened in recent months in part due to sub-prime exposure". But with the outlook for residential property compelling, and with "small banks net borrowers from the inter-bank market they are likely to benefit from downward pressure on inter-bank rates".

The second choice is Indonesia which has apparently been outperforming since 2001. "In part this is the China/commodities story, but it is also a falling inflation/interest story. Consumption growth has been picking up and credit growth is now in excess of 20 per cent," says the report.

The third choice is Thailand, where the report acknowledges "headwinds" of the recent past including rising interest rates, deteriorating politics, and an absence of government investment into infrastructure. All it seems in the midst of change.

Choices two and three highlight the nature of the report. If you were investing in "direction" you would not be investing in an Indonesia known for its corruption and awkward business environment, or a Thailand being managed by the military.

Macquarie Research, though, does just what it says on the tin - "research" to find future value. The report produces a mix of high prices going higher (HK property) and non-directional plays where you need to be prepared to make the first or second mover jump into backing research and judgment not necessarily backed by the current price direction. Choice four is Chinese where the recommendation is to "play China through the mid-caps".

A huge valuation gap has emerged between the large caps and the midcaps so buy Zhejiang Expressway, Shenzan Expressway and Guangshen railway. China also makes up selection five, the greying revolution in China.

As that massive population gets older (and it lives a long time anyway) it will need increased healthcare. The report says "China is about to spend big on health care. Medical devices is the area to be in".

The final selection, also population-focused, is under the heading 'soft commodities'. The report says "throughout history there has never been a jump in energy and metal prices without a corresponding jump in food. Food has lagged in the current cycle, but we do not think this will continue.

In the next leg of the super cycle, food "will be a major winner." Anybody buying into this statement with half an eye on oil prices will realise the opportunity.

- The writer is chairman of Mondial Financial Partners.