Asian emerging markets again a favored portfolio

Asian emerging markets again a favored portfolio

SINGAPORE (Dow Jones): Cheap asset valuations along with resurgent currency and equity markets have turned Asia into a favored emerging market punt, SG's global strategist for emerging markets and Latin America said Tuesday.

SG is the international investment and commercial banking arm of Societe Generale.

"Asia comes out as having some of the cheaper asset valuations, which are no longer distressed because they've bounced back," said Tim Love, a managing partner at SG.

"More important, currencies are now modestly under-valued to their historical (purchasing power parity) -- (compared to when) a lot of them had been 40 percent to 50 percent" ...down before," he said.

Conversely, in Latin America, currencies are still well overvalued, he said, while assets are at distressed levels.

Such systemic fears have subsided in Asia -- to a point.

"In environments of extreme concern, there are the bigger macro factors such as a credit crunch, disinflation, question marks around insolvency and default," Love said.

"But the downside in Asia is not in currencies, its in individual stocks, which have already come off from their peaks -- in some cases 70 percent."

That creates a limited downside and appealing upside, Love said. In the past month, he said SG's Asian equity portfolio has appreciated 15 percent, in addition to reaping 25 percent gains from strengthening regional currencies.

"We're already clear 40 percent," he said, adding that the firm knows that there is a good chance the portfolio will be "restructured and diluted to hell" through mergers and acquisitions as economies such as South Korea and Thailand get back on their collective feet. "But even if that's the case, then maybe the gains will be about 20 percent."

This also contrasts with the investment climate in emerging European markets such as Turkey, Greece and Portugal, he said.

Love said SG's Asian portfolio comprises, and will continue to cherry pick, companies with flush balance sheets and sustainable debt levels, along with a raft of other necessary characteristics, such as liquid daily volumes in domestic equity markets.

Included are "companies such as Posco and Samsung and Hyundai Electronics in South Korea; and BEC World in Thailand," he said, referring to the countries that SG is overweight on.

In Singapore, he said SG favors cash-rich companies such as Singapore Press Holdings (SPH).

"The company has come off dramatically on multiples of 36 times historical earnings to what is now 14 or 15 times earnings," Love said. "The SPH market share is definitely going in the right direction -- 50 percent to 60 percent -- and it is a classic case of a cash flow franchise game that we like to play."

He expects such companies will continue to reap the benefits of a stronger yen and falling U.S. dollar.

"By that definition, the current rally could go further until the value of the yen stalls," he said.

Potential land mines -- such as a messy Brazilian debt moratorium or devaluation, a weakening yen or even a Chinese remnimbi devaluation -- await, he said, along with the expected volatility that comes with any anxious and uncertain economic and politically-charged environment.

"But people are hoping that they've jumped between inflationary trends -- jumped over the default period directly into a reflationary environment," he added.