Thursday, December 2, 2010

Well-managed companies set to gain

Singular Vision
By Teoh Kok Lin

ASIA'S stock valuations are not expensive especially if you pick the right companies to invest for the long term. I sensed lately that there is a growing concern when I speak to investors about Asia's or Malaysia's stock markets.

The fact that Malaysia's stock market index is now hovering near its all-time high of 1,516 points (set in January 2008) is one big cause of uneasiness for some; while EU financial problems and lukewarm US economic data have put a damper on sentiments for others. Some anxiety is not surprising; fresh in many investors' minds are the 2008 global stock market crash, the rebound of 2009 and very volatile markets throughout.

Unnerving investors

Volatile stock markets can be unnerving for investors; since 2008, major stock market indices such as in China, Hong Kong and the United States have experienced gains or losses of up to 3% to 5% a day such huge daily swings are no longer unusual or unexpected.

It is therefore understandable that some investors feel that stock markets (in Malaysia or elsewhere) are due for a big fall, either because stock prices are already too high and/or Western economies have too many unresolved problems. Even a double-dip global stock market crash continues to be bandied about with gusto.

I like to share some of my views on these doubts, especially with regards to Asia's stock market prospects. First of all, are stock prices too high? Asia's stock market indices today (including Malaysia) are still attractively priced and not close to the excessive levels seen in the late 2007/early 2008 market highs (See table). Hence I believe Asia stock prices in general are not expensive yet.

The current Asia bull market rally also means some stock markets will keep hitting new highs, and bull markets can last for many years (for example, the US S&P 500 Index rallied from 295 points in 1990 to 1,232 points in 2000, a continuous bull run for more than nine years, as compared to the current bull run in Asia of about two years).

Second, Asia today is experiencing a major shift in the world's economic centre of power from the West to the East. In this decade, Asia is likely to continue with its rapid economic growth while the West repairs it debt-laden economies.

Growth in Asia will be fuelled by the three big populous and increasingly rich nations of China, India and Indonesia where latent demand for consumer goods is built on a base of almost three billion increasingly wealthier consumers.

According to a World Bank report, China has 32 cars per 1,000 population while India (10 cars) and Indonesia (76 cars) has equally low car ownerships when compared to the United States (819 cars) or Australia (653 cars). For the next 10 years, I would hazard a guess that major car companies will likely sell more cars in Asia than in the United States every year.

On a similar vein, while there may be short-term negative sentiment in China's property sector, I believe that the underlying Chinese demand for housing will be very strong for many more years to come due mostly to increasing wealth (nominal per capita GDP rose from about US$1,000 in 2000 to US$3,735 in 2009 and likely to grow richer) and rapid urbanisation (2.7% annual rate of change) in a country with 1.3 billion population.

This decade, therefore, will offer tremendous opportunities for many established as well as entrepreneurial Asian companies to prosper.

Accurate information

Third, when one invests in stocks, it is the company's business that you invest in. Accurate and timely information regarding a company its business and management is important in order to separate the well-managed from the not-so-well managed companies.

After any stock market downturns, good companies will almost always rebound strongly; something that was quite evident during the 2009 stock market rally. It may be stating the obvious but picking the right stock (or well-managed company) will most likely determine whether one is investing successfully or not.

Finally, as long as the macroeconomic trend is favourable for Asian economies, it also represents fantastic business opportunities for well-managed Asian companies. As Warren Buffett says: If a business does well, the stock eventually follows.

Investing for the long term in companies that will reap the benefits of Asia's high economic growth for many years will likely reap handsome rewards no matter whether there is short-term market volatility, downturns or corrections. In that sense, I am very optimistic for Asian equities this decade.

The writer is the founder and chief investment officer of Singular Asset Management Sdn Bhd.

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