Revisiting Asia, After the Fall

As regional turmoil simmered down last week, investors were getting back to stock picking.
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As Asia's markets begin to slowly pick up again after the late-February fall, international investors are scouring the region's bruised stock exchanges for opportunities.

On Friday, Japan's Nikkei 225 gained 0.43% to 17,164.04, paring its weekly decline to 0.3%. Meanwhile, China's Shanghai Composite Index inched up 0.81% to 2,928.02, rising 3.8% for the week. The index is again nearing what many consider to be the crucial benchmark 3,000 level, which it passed briefly on Feb. 26 before crashing 8.8% the following day.

Thursday's strong buying across Asia spurred a new round of confidence, although Friday's selling in the Shanghai B-shares exchange -- an index of smaller companies listed in foreign currencies -- and Hong Kong's Hang Seng, which fell 0.21% to 19,134.88 and lost 1.6% for the week, left many investors uncertain again. (Despite Friday's weakness in the Hang Seng, the

iShares Hong Kong

(EWH) - Get Report

climbed 1.73% to 15.84, gaining 3.5% for the week.)

Chief on investors' minds now are the importance of the yen carry trade and what particular sectors sport the best long-term growth prospects.

Renewed weakness in the yen and the rise in Japanese equity prices last week came amid widespread consensus in Asia that the yen carry trade is not as vital to the region's money supply as previously feared. Just days after concern about the potential impact of the unwinding of the carry trade (in which investors borrow yen to reinvest in higher-yielding assets -- sent markets spiraling down, one senior Asia analyst described the impact of the trade as meaningless.

"The carry trade on the yen is thought immaterial as 8 million Japanese retirees receive a total of 50 trillion yen over the next three years," said a recent internal research memo issued to traders by J.M. Finn in London. "Most likely ... they will seek overseas investments and yield."

Others say the recent weakening of the yen is just short-term profit-taking by currency traders after the currency's rally last week. But Thursday's rate hikes by the Bank of England, the European Central Bank and the Reserve Bank of New Zealand -- which many say is closely pegged to the Asian economies -- helped put downward pressure on the yen by reviving the appeal of the carry trade.

Whatever the catalyst, most agree Japan's shares look more attractive now, following the recent weakness in the currency, which fell against 15 of the 16 most-active currencies, according to

Bloomberg

. That includes weekly declines of 1.3% vs. the dollar and 0.7% vs. the euro. The

iShares Japan Index

(EWJ) - Get Report

gained 1.7% last week. (Among other Asian ETFs, the

iShares Malaysia Free Index

(EWM) - Get Report

surged nearly 5%, and the

iShares FTSE/Xinhua China 25 Index

(FXI) - Get Report

gained 3.3%.)

At this point in the market's cycle, it's important that Asian markets started trading back in sync last week, according to asset managers. Immediately after the Feb. 27 wipeout, results had been consistently mixed, with the gains in one country or market wiped out by the losses in another. This scenario was creating uncertainty among Asia's international emerging market investors, who in the past few days began to readopt a more "holistic approach" to the region, according to one fund manager.

The return to normalcy has allowed many asset managers to refocus on specific sectors and individual stocks instead of fretting about regional upheaval.

"Monday was a good long-term buying opportunity for us, but banking in China is still not up to regulatory speed," says Jeff Papp, who helps manage funds investing in China for Oberweis Asset Management. "There are some bad loans there. People are taking out loans from the banks to play the Asia market, but these loans have been embedded in the market for a long time."

Papp likes Chinese consumer stocks best, because "the economics are pretty easy -- you have 900 million Chinese migrant farmers all heading towards something resembling the middle-class, and that's a lot of consumption."

Consumer stocks in Asia posted some of the biggest gains at the end of the week, led by

Toyota

(TM) - Get Report

, which traded up 0.3% to 7,860 yen, and

Sony

(SNE) - Get Report

, which rose 2.8% to 6160 yen.

Honda Motors

fell back 0.23% to 4310 after late profit taking from Thursday's rally in the shares. (In New York trading Friday, Toyota ADRs slid 1% while Sony's climbed 2.2%.)

The confidence in Asian automakers prompted

Guangzhou Automobile Group

, a southern Chinese automaker, to renew plans for a listing on one of the Chinese stock exchanges. The group plans to raise 200 billion yuan (about $26 billion) over the next three years to fund expansion plans of manufacturing more cars for the Chinese market, the automaker announced.

Nomura in Hong Kong advises investors to watch out for chemical companies in China, however. "We think expectations are low for deep cyclical industries such as steel and chemicals, so investors should examine these companies for surprises," says the note. But the Nomura also points to renewed optimism for Taiwan as the country benefits from "both a pick-up in China demand and improving U.S. import trends."

Papp says that insurance is still overvalued, in particular

China Life Insurance

(LFC) - Get Report

, which trades at 30 times next year's earnings, despite the monopoly the company holds over the Chinese market. China Life Insurance ADRs rose 0.5% Friday after the company announced its premiums more than quadrupled to 1.2 billion yuan, or $155 million.

It's difficult to say how Asia will perform in the near term after the recent volatility, but "the economic fundamentals of the region have not changed that much since last week," Papp notes.

At the time of publication, Daniel M. Harrison had no positions in any stocks or ETFs mentioned in this article.

Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

www.theglobalperspective.biz

. He lives in New York.