Asia well placed to emerge from the credit crunch

Asia's stock markets have been hurt more than most by the global economic crisis. However, the underlying story offers reasons for optimism, according to Aberdeen.

What became obvious in 2008 was that Asia had not decoupled from the developed world as many had expected. Not only were Asian economies still highly dependent on Western demand for manufactured products, but regional markets had also been the destination of vast foreign portfolio flows that reversed towards the end of 2007. Throughout 2008, economic growth - and growth forecasts - plummeted, and Asian stock markets fell much further than their Western counterparts.

Having failed to decouple, Asia will find faltering Western demand painful in the short term, as it feeds through to rising unemployment. Asian economies must now focus on the next stage of their evolution, in which domestic consumption and investment takes over from external consumption and investment. Only then can the region take significant steps in decoupling from the West.

While developed nations have consumed and borrowed too much, Asia over-saved, with the result that the region is now on sound footings compared with developed markets. There is no escaping the short-term pain, but Asian business should emerge from the credit crunch stronger rather than weaker.

Of course, although the long-term outlook for Asia is positive, and markets now look fair value, near-term equity performance will depend on the severity of the economic shock. Fortunately, many companies are well positioned to withstand the slowdown before monetary and fiscal stimulus measures take effect. For instance, Asian banks tend to be more conservative than their counterparts in the US and the UK, and generally have stronger loan-deposit ratios. Across sectors, many Asian companies have low levels of debt and are producing all-important healthy free cashflow. On the downside, many remain heavily reliant on exports to Europe and the US.

Aberdeen's portfolio positioning continues to reflect where its Asian equities team finds well-run, attractively valued companies. Although the Singaporean economy has slipped into recession, the country continues to be a major overweight, being home to solid companies operating across Asia. India, with its wealth of well run companies, remains another key overweight despite the Satyam fraud scandal. On the other hand, Aberdeen has been underweight mainland China for some time, despite its impressive economic growth potential. With quality Chinese-listed companies managed for shareholders still thin on the ground, the team prefers Hong Kong-listed stocks.

Hugh Young, managing director of Aberdeen Asset Management Asia, comments: "2009 will be another difficult year for economies and stock markets around the world. While Asia won't be immune from the effects of the global slowdown, the region's low levels of consumer, corporate and government debt leave it better placed than most.

"Company valuations are compelling. Of course, they may get cheaper still given the uncertainty surrounding the global economy, but with Asia set to emerge from the credit crunch stronger than ever, now is without doubt one of the most attractive times to invest in Asia Pacific equities that I have witnessed in over 25 years in fund management."