T. Rowe Price sees good opportunities at reasonable valuations in Asia
The US Federal Reserve Bank is raising interest rates in December, but a US recession in the next year is highly unlikely, meanwhile there won’t be an economic crisis in Asia because the region is benefiting from lower commodity prices, which will lead to higher earnings, said fund firm T. Rowe Price recently.
The mutual fund giant’s global market experts presented the firm’s 2016 Global Market Outlook to the New York business press right before Thanksgiving.
“Economic growth is slow everywhere,” said Alan Levenson, chief US economist for the Baltimore, Md., fund company. Levenson expects the US economy to grow about 2.25% both this year and next because low commodity prices are keeping inflation below previous forecasts. He added the low commodity prices should help commodity importers around the world, such as India and Mexico.
However, he expects China’s gross domestic product to see growth slowdown to 6% on a sharp decline in fixed asset investment.
Even so, T.Rowe predicts China will remain the fastest growing region in the world.
“Still, I expect the Fed to raise rates next month, because they really, really want to,” said Levenson. However, the European Central Bank could lower interest rates in the same month. He predicts by the end of 2016, US rates will be up at least 100 basis points.
Robert Sharps, a senior portfolio manager of global equities and a member of T.Rowe’s equity steering committee agrees with Levenson it will be a slow growth world, but added, “slow recoveries make long recoveries. There’s not much dislocation to imply the bull market is coming to an end.”
He believes the US is the best place to be on a local currency basis, because corporate profits are less driven by exports and global growth. Meanwhile, “the US is very well represented among the industries and economies gaining a larger share of the global economy.” He said the big themes are ecommerce and cloud computing and likes Facebook, Priceline and Amazon.com. Meanwhile he said over the past year, the Russell 1000 Growth Index has outperformed the Russell 1000 Value Index.
Among the Asian markets, Sharps said with Japan entering its second recession under Abenomics, the government’s economic plan, it shows the government is struggling to find meaningful ideas to fix the economy.
“The Japanese have to work in an export-driven economy,” said Sharps. “They don’t have the tool box to deal with the lack of internal growth. In the US companies have restructured, repurchased shares and consolidated, all of which runs counter to the historical culture of Japanese corporations.
“And US corporations have been innovating,” he continued. “Japanese companies have not. It’s forcing managers to go outside their comfort zone and begin to focus more on earnings profitability and the priorities of shareholders over other stakeholders, such as employees.”
As for the rest of the region, Anh Lu, the firm’s portfolio manager for its Asia ex-Japan equity strategy, said it’s underperforming the developed world, but there won’t be an economic crisis.
“I don’t see a booming scenario or doomsday scenario next year,” said Lu. “But there are lots of good opportunities with improving fundamentals.”
She said the good news for Asia was falling commodity prices; reforms were happening, although at a slow pace; and that the earnings outlook is improving. The bad new was high debt levels, especially in China, poor export demand, low confidence levels and a return on equity that needs improvement. In general she sees good opportunities at reasonable valuations.
While some pundits warn of a repeat of the 1997 Asian economic crisis, Lu says although debt levels have risen sharply, the debt is largely domestically owned and in the local currency. External debt to GDP is much lower than during the 1997 crisis. In addition, most of the region runs a current account surplus compared to the deficits of the late 90s.
She said earnings in the region have fallen because companies don’t have “the right cost structure.” Many in Asia didn’t experience the full effects of the fiscal crisis of 2008, said Lu. Many companies didn’t cut costs like firms in the West and became complacent about profits after four years of top-line growth. But, over the past 18 months they’ve experienced poor growth, and price/earnings multiples have compressed. Companies are now beginning to adjust how they do business
“This makes me think earnings will probably improve over the next four years,” said Lu. The price-to-book ratio for the MSCI AC Asia ex-Japan Index was about 1.5 compared to nearly2.25 for the MSCI World Index as of Oct. 31.
Meanwhile, both China and India are moving in the right direction on reforms, which are getting the capital expenditure cycle moving again, but the pace is slow because they are both such big economies.
Lu listed four big reforms she said needed to happen. State-run enterprises need to be managed better and realign the incentive system for management, so that it works better from the shareholder perspective. Also, the government needs to continue the anti-corruption campaign, and the debt problems need to be addressed.
Bad debt still remains a big challenge in China because most of the debt sits with government and quasi-government entities, which have an implied sovereign guaranty. While China has cut rates to ease the burden it has a lot of tools and needs to do more.
Lawrence Carrel is an award-winning journalist and author of ETFs for the Long Run: What They Are, How They Work and Simple Strategies for Successful Long-Term Investing and Dividend Stocks for Dummies. His work has appeared in The Wall Street Journal, SmartMoney, TheStreet.com, Kiplinger’s Personal Finance Magazine, Reuters, The Associated Press, Investor’s Business Daily, Business WithoutBorders.com, The Economist Intelligence Unit, Financial Planning, Barron’s Online and others.
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