As the global economic slowdown is felt around the world, Daily Interview turns to
co-manager of the
AIM Asian Growth fund, to see how Asian businesses are faring and how he's making investment decisions for his fund.
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The effects of an economic slowdown in the U.S. are particularly acute for some Asian economies, whose exports to the U.S. account for 10% to 25% of their GDPs. Moreover, much of the trade comes from sales to the U.S. tech industry. But Sides still sees opportunities for companies doing business in China and with certain Indian software companies.
TSC: In the worst-case scenario of the current slump, could Asia again experience a crisis similar to that of 1997?
No. The 1997 crisis was a reflection of structural imbalances of the economies in Asia and was caused by enormous overcapacity of office buildings, factories and goods. The world was saturated with Asian goods then. The challenge Asia faces now is that the global growth engine has slowed down.
Currently, the region has come back to the pre-1997 growth levels of 4% to 5% a year for Japan and Asia, which is as fast as for any area in the world. Sustaining this growth, especially internal growth, is key. It's positive that we have not had an employment crisis in Asia, and savings have always remained high. Also, consumers are still spending. In Hong Kong, unemployment is at 4.4%, which is relatively high for the city but should not derail its economy.
Consumption is still a big theme in Asia. Consumption accounts for about 60% to 70% of the total economy in developed nations such as the U.S. and Japan. In Asia, it's less than that because they're more export-oriented. I am confident that Asia will not slip into recession the way it did in the past. But I don't see this as an optimal situation either.
TSC: In fact, with exports to the U.S. accounting for so much of Asian economies' GDPs, do you worry that many companies in which you invest are very vulnerable to the slowdown?
We construct our portfolios stock by stock rather than make bets on certain sectors by trying to predict their growth. Even when we see demand slipping in the U.S., we can pick up a company like
, a maker of office automation equipment, which is enjoying tremendous success, even in its business to the U.S.
is another example I have mentioned. Their PlayStation2 is still in great demand, and Sony's Vaio is one of the best-selling computer brands right now.
TSC: How do the Asian markets move in correlation to others? Could you describe the anatomy, if you will, of the slowdown Asia is experiencing right now; which sectors are worse hit than others?
Asian markets generally lead a recovery in developed markets. The reason for this is that they are geared to their expectations of developed market growth and lack thereof. There is a high correlation, for example, between the
Organization for Economic Cooperation and Development leading indicator and the performance of the emerging markets. And typically when the OECD leading indicator starts to turn up, that's when Asian markets start to turn up. That can be in advance of companies in Asia that are starting to receive orders. You may have market prices that move up ahead of businesses flowing to the region. But there wouldn't be too great a lag, perhaps by a couple of months.
In areas such as semiconductors, the problem has not only been about overcapacity but also inventory, so we have to let that work off. But in terms of telecom equipment, the region is not a big producer, but rather a sizable consumer, sourcing from
, etc. This was in evidence when
announced this week that it has awarded contracts to build a mobile phone network worth a total of $1.46 billion to companies including
The biggest factors that have suppressed the Asian markets have been the performance of the
and expectations for the U.S. growth. Markets like Taiwan benefited early on this year from the
rate cut and hope of aggressive easing by the Fed to jump-start the U.S. economy. Investors lost confidence and enthusiasm in this scenario by the end of January, and the Taiwanese market sold off.
Taiwan has a very high correlation with the Nasdaq because of its tech-heavy economy. Taiwan has world-class producers and market leaders in their tech businesses. But they rely on external demand to keep going. Currently,
, for example, is running at about half of its capacity and has yet to see improvement in new orders.
TSC: What are some of the trends that have driven growth in the companies you invest in, and how does your investing style capture the upside in the current environment?
Asia is a high-growth region, offering great earnings prospects for companies doing business in certain areas. Consumption in China, for example, has been a very big theme this year. Some of the best-performing companies have been doing business in China. A good example is the Japanese automakers selling cars in China. Demands for PCs and cell phones are also on the upswing. China will take over the U.S. as the largest cellular market in the world by year end. Also consumers are graduating up, replacing their products with better and more expensive items. You can capture this by investing in the businesses that are capitalizing on this trend.
We build portfolios company by company by focusing on growth; while many international investors tend to emphasize value, we prefer to identify growing companies that demonstrate ability to grow their earnings consistently and to surprise the market with better-than-expected earnings performance. Those are the ones that tend to outperform rather than trying to pick the bottom and risk getting caught into a value trap. And Japan has been a value trap for a long time.
TSC: Which companies in Asia do you like and why?
We see growing consumption in China as a key trend this year.
produces sedans in China in alliance with
, and has been a very good performer. A company that we think has come back to more reasonable valuation is
. Legend manufactures its own PCs but also distributes foreign brands like
. Both Denway and Legend have the deepest market penetration and best distribution, which give them a great competitive advantage in China. And both companies are listed in Hong Kong.
We also think that some Indian software companies are attractive: Both
Satyam Computer Services
are trading at multiples below their growth rates. These companies consistently generate earnings of 30% to 40% a year, and have a history of surprising on the upside. They have conservative estimates looking forward and tend to outperform market's expectations of their earnings. And we have the added benefit of very reasonable valuations and of trading in the U.S. as well. Indian software companies are a good place to be right now.
What's your view of NTT DoCoMo (NTDMY) ? It announced great earnings last week with a 45% rise in net income, boosted by their wireless Internet access service.
It's a great company that has done extremely well. But its business is also helped by a uniquely cultural aspect: The mobile Internet has been readily embraced by the Japanese, but not in other parts of the world. Not even in the rest of Asia. Japan is a homogenous and dense society with the infrastructure. When 3G finally rolls out in other parts of the world, it's going to be very well-positioned to take advantage of the demand. Meanwhile, the subscriber growth and performance in Japan is enough to keep us excited about the company.