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Inflation has not quite peaked
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Growth in China is set to slow down
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Property prices remain stable; national property bubble does not exist
Inflation - has it peaked?
Inflation hasn't quite peaked, in my opinion, but we are getting closer to the peak in certain countries. We have seen food prices pick up and some very rapid credit growth, but these are both now coming back under control. For example, in China, where M2 monetary growth was at almost 40% at the peak, it has now dropped to a more sustainable 15%. In countries such as China, that are further into the tightening cycle, we are probably only a quarter away from the peak, but elsewhere, such as India, we remain concerned.
Danger of China over-tightening
We will see economic growth in China slow, and there are already signs momentum is beginning to slow. I don't think that is such a bad thing; there was potential for the Chinese economy to overheat, and a growth rate that is moving down towards the 7-8% range is much more sustainable. Investors might be a bit nervous when we get that change, but overall it is a positive move.
Property bubble risk
The Chinese Government has gone out of its way to control this, and there is certainly not a national property bubble in my opinion. In certain local markets there have been some very sharp moves: in Beijing and Shanghai, prices doubled over a 12-month period. For the country as a whole, however, prices remain under control. In fact, they have moved up roughly in line with incomes over the last five or six years. Property prices have stabilised overall but the market is very diverse with some areas still buoyant but others showing some weakness. With a very manageable amount of leverage in the sector, we are reasonably comfortable.
Chinese banks and local government debt concerns
During the global financial crisis the Chinese authorities took dramatic steps to support growth. They encouraged a lot of infrastructure investment, which was largely funded through the banks. This type of lending is significant but currently accounts for slightly less than 10% of the large banks' balance sheets. We will not know for a few years how these loans will perform, because infrastructure investment has a very long period of gestation and it will take some time before repayments are made. There are two reasons why we are reasonably comfortable with this situation. Firstly, the authorities are aware that this is a concern, and they have encouraged the banks to take extra provisions against the potential for bad debt. Secondly, the central government could ultimately step in and help support these loans if they started to go bad. We do, however, need to keep a close eye on it.
Opportunities for income in Asia
The dividend yield for the Asian region overall is about 3%, which is quite attractive. In fact, more than 80% of Asian companies are paying out some form of dividend. Finding yield per se is not particularly difficult, but we are focused on finding companies that provide growth as well as a dividend yield. The example of Australia demonstrates this well - while we have some exposure, our weighting remains relatively low compared to the benchmark. That is because, although some companies in Australia offer an attractive yield, we find it more difficult to identify companies that offer growth potential as well. We are looking for a combination of income and growth, and finding that balance is challenging, but we are finding plenty of opportunities.
Outlook for Asian markets
Our outlook for Asian markets is positive. Given the headwinds currently facing global markets, such as the end of the second round of quantitative easing in the US and the sovereign debt concerns in Europe, it is very difficult for Asian markets as a whole to re-rate significantly on a price/earnings (PE) basis. We do, however, believe that earnings growth in the region should continue to be quite strong, and we are expecting good earnings growth in China, Thailand and Malaysia. We are slightly more negative about Australia, as mentioned above, which is a mature economy, and we do not expect rapid growth in India, where we think that inflation has still not been fully tackled, and as such the investment outlook is not particularly good in the shorter term.
Outlook for the Invesco Perpetual Asian Fund
As discussed earlier, there are still a number of headwinds for global markets, although we remain optimistic for Asia. As such, our portfolio is tilted towards domestic sectors - we are overweight financials and real estate, for example - but we are underweight some of the bigger global sectors, where we think there may be too much exuberance in the price, like the materials and energy sectors. For the portfolio overall though, we remain optimistic.
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