9th December 2010
Mike Kerley, a fund manager at Henderson Global Investors says: "Equity valuations across Asia look pretty compelling and we believe Eastern markets will outperform those in the West over the coming six to nine months on both an income and capital basis.
"It won't be all smooth sailing though; we will likely be pulled from pillar to post in the coming months on the back of views on recovery in the West. The greed/fear scenario will continue and the inflation/deflation and growth/no growth debates will continue. Asia will be dislocated by which ever is the stronger sentiment in these arguments."
John Flint, chief executive of HSBC Global Asset Management, which now boasts more than US$100 billion in assets under management in emerging markets agrees that the region has much to offer investors.
"Much of the emerging world benefits from low levels of government and household debt and favourable demographics. This will help to fuel domestic consumption as the world rebalances."
Risks of asset bubbles developing as "ultra loose" monetary policy in developed markets has sent investors flocking to the region cannot be ignored, but Flint says: "We are not there yet. On a price-to-book basis, valuations still look attractive for many emerging equity markets."
While many have already flocked into the Chinese market, India has also courted a lot of attention. Larry Summers, one of Barak Obama's outgoing advisers, coined the term the "Mumbai Consensus", and said India, as the world's largest democracy was the model to watch, as reported in this Reuters blog.
That model is set to dominate global thinking by 2040, according to the FT's beyondbrics blog .
HSBC is most under-weight in India, as it believes it is over-valued, but Henderson's Kerley pin-points India as the one to watch. He says that while China is currently offering a better combination of value and growth, India is not far behind.
He explains: "India is at the early stages of a multi year investment boom which is very capital intensive and not particularly rewarding for the income investor.
"This will change in time as companies mature and benefit from the investments made in terms of cash flow generated but in the next few years there are some risks attached to this rapid growth phase."
In the short-term though, he says that China is still the better bet. "The Indian economy and market will provide significant opportunities for investors in the years to come but at the moment the risk / reward ratio favours China over India," Kerley adds.
"In the short term both economies are expected to deliver around 9% GDP growth in 2011 yet China is 30% cheaper in terms of forward PE. It is this valuation differential together with a more advanced dividend policy which leads me to favour China over India at this point."