Services sector provides long term boost for Asian equities

Many Asian stock markets could well receive a boost from the nascent services sector as the region's consumers spend more, according to Fidelity International. Countries in the region still have a relatively low ratio of debt to GDP (the Philippines is 68% and Thailand's is 49%), despite a comparatively large US$787bn spend on economic stimulus packages and this puts consumers in a position to consider greater discretionary spend.

Catherine Yeung, Associate Director, Asia Pacific ex-Japan equities at Fidelity International, explains, "In the year to date Asia Pacific ex-Japan equities are up by around 50%; on a three year basis, the region is up over 20%. One good reason why this could be sustainable can be found in the services sector.

"As per capita income rises, the share of GDP from services also goes up (namely as Asian incomes rise, demand for services grows at a faster rate). We can see this benefitting a number of service industries such as tourism, notably hotels, travel agencies and airlines, and leisure companies, particularly companies providing gaming and food and beverages.

"In addition, other higher end discretionary spending is in the auto sector - car sales across most of the region have risen in the year to date. Significantly, China has now overtaken the US in terms of new car sales this year and sales are expected to push higher given the fact that so few Chinese own cars - currently just three homes in 100 owns a car there.

"The main reason we expect more cars to be purchased in China is that it's GDP per capita this year is US$3,500. Analysis says that, once this level has been breached, discretionary spending kicks in. Cars could well appear on more and more Chinese shopping lists.

"As so often in the region, where China sets the trend, others follow. Indonesia and the Philippines are at GDP per capita of around US$2,000 while India is rising from US$1,000. The potential for auto sales in the region over the next ten years could be huge.

"Outside of services, the fundamentals are in place for a sustained rally. For example the value of deals, such as new issues, in the year to date is already well past the total for 2008 at around US$112 bn. Liquidity is good, as a healthy balance of both domestic and US investors have placed money into the regions markets, and we are seeing more anecdotal signs of greater confidence from domestic investors - for example, previously Taiwanese companies would list in Hong Kong or Singapore but now they consider listing in Taiwan instead.

"While valuations on stocks are high the macro picture is sound from a structural perspective. Investors in the region obviously need to consider the fact that Asian economies are still reliant on the fortunes of the global consumer but the glass still looks half full, not half empty."

Catherine Yeung concludes: "Asian equities have definitely recovered from the lows we saw back in November last year and GDP growth for developing Asia is set to reach over 6 per cent next year which is more than double that expected in the Western hemisphere. The structural story in Asia remains intact and the region is in a fortunate position whereby government, corporate and personal balance sheets are healthy."