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Financial Mirror (Cyprus) - - FRONT PAGE -

Asia ex-Ja­pan ap­pears to be one of the few bright spots for growth. In a “slower growth” world, the re­gion is still ex­pected to main­tain gross do­mes­tic prod­uct (GDP) growth at around 4–5% per year. How­ever, with growth mod­er­a­tion be­ing a global phe­nom­e­non, Asia, like many other parts of the world, is un­der­go­ing a grad­ual growth de­cel­er­a­tion.

So how will Asian economies and cor­po­rates sus­tain their com­pet­i­tive­ness, and what are the im­pli­ca­tions for Asian eq­uity in­vestors? We be­lieve favourable cost struc­ture for cor­po­rates, a syn­chro­ni­sa­tion of Asian cur­ren­cies and the trans­for­ma­tion of economies by new gov­ern­ments will set a pos­i­tive tone for Asia in 2015.

Asia ex-Ja­pan is un­der­go­ing a nor­mal busi­ness cy­cle ad­just­ment. As gen­eral de­mand is grad­u­ally lev­el­ling off amidst de­cel­er­at­ing global growth, in­put costs are ad­just­ing in re­sponse: costs of ma­te­ri­als - rang­ing from agri­cul­tural prod­ucts to hard com­modi­ties - are the big­gest cost re­duc­tion driv­ers.

Fi­nanc­ing costs are com­ing down in se­lected mar­kets, such as China and Korea, where we have seen in­ter­est rate cuts. Look­ing ahead, fur­ther in­ter­est rate cuts for Hong Kong, Sin­ga­pore, Korea and Tai­wan may be limited, as sug­gested by their low 10-year sovereign bond yields, which were be­low 3% fol­low­ing the year-to-date decline. In con­trast, we see op­por­tu­ni­ties in coun­tries with rel­a­tively high in­ter­est rates for fur­ther rate cuts to stim­u­late de­mand. Th­ese in­clude high­pop­u­la­tion, net oil-im­port­ing coun­tries like China, In­dia and In­done­sia, which should ben­e­fit from de­clin­ing en­ergy costs and a softer in­fla­tion­ary out­look.

Look­ing ahead, we be­lieve a favourable cost struc­ture for cor­po­rates will serve as a key cat­a­lyst for mar­gin im­prove­ment.

Cur­rency has been a swing­ing fac­tor in de­ter­min­ing re­turns of spe­cific Asian mar­kets for the last two years. The US is the only bright spot in the de­vel­oped mar­kets that of­fer strong fun­da­men­tals and healthy growth. As such, ev­ery Asian mar­ket is bid­ding to win busi­ness with the US and is will­ing to revalue its own cur­ren­cies.

For­eign ex­change ad­just­ment is the quick­est and most di­rect way to pre­serve com­pet­i­tive­ness, and his­tor­i­cally this ap­proach has of­ten moved ahead of poli­cies that are nor­mally de­pen­dent on eco­nomic data.

We ex­pect the US dollar to con­tinue to strengthen head­ing into 2015. With key mar­kets de­pre­ci­at­ing for the past three months - Ja­panese yen are down -10.0% and Korean won are down -4.3% - we pon­der how the other Asian cur­ren­cies will re­act. In­stead of cur­rency di­ver­gence across the re­gion, we are likely to see Asian cur­ren­cies move in a more syn­chro­nised man­ner in 2015. In any case, a stronger US dollar would be pos­i­tive for Asian ex­porters.

In the past two years, China, In­dia and In­done­sia have ush­ered in cru­cial new lead­ers. In par­tic­u­lar, the re­cent elec­tions in In­dia and In­done­sia marked the start of a new be­gin­ning for the Pa­cific Cen­tury and its na­tions, which ac­count for about 20% of the world’s pop­u­la­tion.

Re­forms were rolled out in earnest shortly af­ter new lead­er­ship took the helm of gov­ern­ments in sev­eral coun­tries. In a world of slower growth, we be­lieve main­tain­ing com­pet­i­tive­ness is very im­por­tant. As such, we be­lieve a ded­i­cated fo­cus on com­pe­ti­tion and pro­duc­tiv­ity are com­mon goals of the re­forms be­ing launched by the var­i­ous na­tions. For ex­am­ple: • In China, its re­form fo­cused on a na­tion­wide anti-cor­rup­tion move­ment and dereg­u­la­tion in the own­er­ship struc­tures of state-owned en­ter­prises (SOEs) in an ef­fort to grow the pres­ence of the coun­try’s pri­vate sec­tor. This will likely im­prove ef­fi­ciency and align the cor­po­rates’ in­ter­ests with those of its share­hold­ers. • In­dia launched sev­eral mea­sures to sup­port eco­nomic devel­op­ment, in­clud­ing labour dereg­u­la­tion to pro­vide a more flex­i­ble cost struc­ture. For ex­am­ple, the gov­ern­ment passed four im­por­tant labour laws that made it eas­ier for com­pa­nies to hire, train and dis­miss work­ers. The new laws also stiff­ened the rules for trade union reg­is­tra­tion. • In In­done­sia, the first re­form step for the new gov­ern­ment was to im­prove fis­cal deficit by car­ry­ing out dif­fi­cult de­ci­sions, such as re­duc­ing en­ergy sub­si­dies, which helped gaso­line prices in the coun­try move closer to mar­ket-determined rates.

Each na­tion has its own pri­or­i­ties. As such, it is un­likely for us to see a har­monised ef­fort to im­ple­ment struc­tural changes among the var­i­ous Asian economies. Yet, given the di­ver­sity in Asia, we be­lieve we will con­tinue to see greater re­form ef­forts from the var­i­ous coun­tries, al­beit with dif­fer­ent tar­gets, and at the coun­tries’ own pace.

With earn­ings on the MSCI AC Asia ex Ja­pan In­dex ex­pected to ex­pand 9.6% in fis­cal-year 2015, Asia ex-Ja­pan is no longer the growth en­gine it once was, as world trade has been static over the last three years.

In­stead of fo­cus­ing on top-line earn­ings growth, we be­lieve Asian eq­uity in­vestors should shift their fo­cus to the search for qual­ity stocks, as mea­sured by their com­pet­i­tive­ness, share­holder re­turns and cor­po­rate gov­er­nance. More at­ten­tion should be paid, we be­lieve, to com­pa­nies’ cap­i­tal al­lo­ca­tion dis­ci­pline. Man­age­ment in­cen­tive schemes are also be­com­ing more popular in Asia to align man­age­ments’ and share­hold­ers’ in­ter­ests. This has re­sulted in an in­creas­ing di­ver­gence be­tween com­pany share prices and sec­tor per­for­mance.

The dif­fer­ence in re­tain­ing the pric­ing power and mar­gin will ul­ti­mately be re­flected in share prices. We be­lieve this should be a pos­i­tive en­vi­ron­ment for ac­tive man­agers to add value over pas­sive funds that aim to re­sem­ble in­dex re­turn as a whole, but ne­glect to dif­fer­en­ti­ate the win­ners from the losers.

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