Short-term warning on Asia, but fundamentals remain intact

After impressive gains year-to-date investors in Asia Pacific markets should be mindful of the risk of a near-term pull back, according to Peter Dalgliesh, manager of the F&C-managed Pacific Assets Trust.

Even though Asian markets have been relatively overlooked in recent months as economic growth in most Western nations has turned positive again, the region is now trading above historical average valuations. Dalgliesh says that this, combined with high expectations from investors and analysts, means the risk of disappointment has increased.

"A lack of top-line growth due to the easing of government stimulus measures may trigger a correction now that the liquidity-led lift-off phase appears to be nearing an end," said Dalgliesh. "Furthermore, as markets contend with the prospect of exit strategies by global central banks, easing risk spreads are unlikely to sustain their recent downward trends, challenging the lofty level of investor risk appetite."

Because of Asia's relatively higher-beta status and formidable returns year-to-date, Dalgliesh says the region is now vulnerable to some profit-taking. However, over the medium and longer term he believes the case for investing in Asia Pacific equities is still strong. "The structural growth story inherent across Asia remains compelling and with a banking system that is relatively robust, the prospects for high sustainable GDP growth are good," he concluded.

Pacific Assets Trust has just reported results for the quarter ended 31 October 2009. Net asset value total return was 6% over the three months, compared with 5.3% from the MSCI All Country Far East ex Japan index.