Although Asia has experienced a sharp correction over the past few months amid fears that the US Federal Reserve will scale back the stimulus that brought robust growth to the region’s capital markets, some larger fund managers say they still need to see a further correction before they take the plunge.
Templeton's Cindy Sweeting has been buying bargain assets in Europe since the 2008 crisis and says good value can still be found in pharmaceuticals, industrials, airlines and consumer goods.
“We would like to see another 15-20% correction before we get excited about this region,” said Cindy Sweeting, portfolio director at Templeton Global Equity Group and one of the three people in charge of managing in excess of $100 billion in funds.
Expectations of earnings growth in Asia remained high even though the earnings themselves have not met those expectations, Ms Sweeting said recently during a visit to Bangkok.
“If you take the earnings into account you would like to see the expectations come down,” she said, while stressing that although there was good potential for growth in the long term, the markets in Europe offered greater potential after taking a hammering in recent years.
She said that despite the upswing seen in many European markets lately, the price-to-book value of the overall market in Europe remains at a mere 1.6 times and price-to-earnings ratio at an appealing 11.6 times, compared with a longer-term average of about 15.9 times from 1980 onward.
The earnings potential for companies in Europe also has yet to catch up to that of its United States peers (Chart 2). Earnings of US and European firms have moved more or less in tandem for decades, but the gap has widened significantly since 2010, said Ms Sweeting whose funds are separate from the Emerging Markets funds handled by the well-known Mark Mobius.
She said her fund had been buying assets in Europe for years since the recent crisis that offered the opportunity of a lifetime to fund managers across the world, but the key was the ability to be time the decision to take the plunge.
Ms Sweeting sees value in every market in Europe. One does not have to touch the countries that have faced the most serious economic trouble but even so, it is possible to dig out undervalued companies, both large and medium-sized in terms of capitalisation.
Areas that Templeton is keen on are financials, pharmaceuticals and cyclical stocks such as industrials, airlines and consumer goods, all of which are discounted to their valuations. She said that pharmaceutical assets account for about 18% of the global portfolio and although they have risen over the past few months they are still good value.
Templeton, she said, had made the purchases during the peak of the economic crisis, and although it was a tough decision it was the way the company operates.
“We take advantage of the market fluctuations and when everyone is exiting the market, being a contrarian is not easy task,” she said.
There are times, however, when even big fund managers make mistakes. One such mistake was when her fund purchased financials six months ahead of the peak of the European crisis.
“Things went down and we held a big meeting and during the meeting it was decided that these assets were trading at 30-50% of the tangible book value, and even at liquidation we would get our money back,” she said.
The manager who makes tough decisions about buying says it is not easy to let go of stocks but advises investors to “never fall in love emotionally” with the assets one purchases.
Buying opportunities will come to Asia as well as there are lots of inherent problems in markets such as China, where there has been overinvestment in capacity and financial institutions have lent recklessly in the past.
“The focus in China is going to be on quality of growth rather than quantity, and growth in China is set to moderate for a while,” she said.
She added that the problem in the corporate sector in China was that free cash flow of non-financial firms (Chart 3) had been negative since 2006.
This would make the growth in the region more realistic and balanced, and this could lead to a possible correction, although there is value that can be seen in some markets such as South Korea and Taiwan.
The balancing of growth will also lead to a “distinguishing” of countries that offer good value and are fundamentally sound, such as Thailand due to its overall macroeconomic strength with those that are weaker, such as Indonesia and others.