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Khiem Do August 14, 2008. The Asia Pacific Fund, Inc. Investment Community Conference Call Asian Investment Outlook www.asiapacificfund.com. Table of Contents. Page Section 1: Asian Markets Review2 - 5 Section 2: Asian Investment Outlook and Strategy 6 - 28. Section 1 - PowerPoint PPT Presentation
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Baring AssetManagement (Asia) Limited19/F, Edinburgh Tower, 15 Queen’s Road Central, Hong Kong
Tel +852 2841 1411
www.barings.com
Authorised and regulated by theFinancial Services Authority
Khiem Do
August 14, 2008
The Asia Pacific Fund, Inc.Investment Community Conference Call
Asian Investment Outlook
www.asiapacificfund.com
2
Table of Contents
Page
Section 1: Asian Markets Review 2 - 5
Section 2: Asian Investment Outlook and Strategy 6 - 28
Baring AssetManagement (Asia) Limited19/F, Edinburgh Tower, 15 Queen’s Road Central, Hong Kong
Tel +852 2841 1411
www.barings.com
Authorised and regulated by theFinancial Services Authority
Section 1
Asian Markets Review
4
Local Currency exchange rate (US$/Local rate)(3 month period to June 30, 2008)
03/31/2008 06/30/2008 Change %*
North AsiaChinese Renminbi 7.01 6.85 2.3New Taiwan Dollar 30.38 30.35 0.1Hong Kong Dollar 7.78 7.80 -0.2South Korean Won 990 1,046 -5.3
ASEANSingaporean Dollar 1.38 1.36 1.4Indonesian Rupiah 9,205 9,220 -0.2Malaysian Ringgit 3.20 3.27 -2.1Thai Baht 31.49 33.44 -5.8Philippines Peso 41.77 44.90 -7.0
Indian Rupee 40.12 43.03 -6.8VN Dong 16,110 16,842 -4.3
*: + denotes an appreciation of the local currency vs the USD (and vice-versa)Source: Factset, Bloomberg
Most Asian currencies corrected vs the USD in the June quarter (except Renminbi and Sing $)
5
Asian Stock Markets: Country Performance(3 month period to June 30, 2008)
‘Growth’ markets of VN and India continued to fall sharply, while Singapore and HK/China fared relatively better
Gross return in USDCountry - Index (%)
North AsiaMSCI China Free -3.5MSCI Hong Kong Free -3.9MSCI Korea Free -7.6MSCI Taiwan Free -10.5ASEANMSCI Singapore Free -0.9MSCI Indonesia Free -4.5MSCI Malaysia Free -9.1MSCI Thailand Free -11.8MSCI Philippines Free -24.8
MSCI AC Far East Free Ex Japan Gross -6.4
MSCI India Free -19.7Vietnam (HCM Local price index) -22.7
Source: Factset, Bloomberg
6
Asian Stock Markets: Sectoral Performance (3 month period to June 30, 2008)
Source: Factset
MSCI Energy 7.7MSCI Consumer Staples -0.4MSCI Utilities -2.8MSCI Financials -5.5MSCI Materials -6.4MSCI Information Technology -8.3MSCI Telecommunication Services -8.8MSCI Industrials -10.7MSCI Real Estate -11.4MSCI Consumer Discretionary -13.0MSCI Health Care -17.1
Gross return in USD(%)
Defensives (Energy, Consumer Staples) led, while Cyclicals (Consumer Disc., Real Estate) lagged
Baring AssetManagement (Asia) Limited19/F, Edinburgh Tower, 15 Queen’s Road Central, Hong Kong
Tel +852 2841 1411
www.barings.com
Authorised and regulated by theFinancial Services Authority
Section 2
Asian Investment Outlookand Strategy
8
Performance of Global Asset Classes:Extremely challenging environment !
Source: BCA Research (7/2008)
3-Month Risk vs Return * 12-Month Risk vs Return *
Only commodities, cash and high quality bonds produced positive returns
9
Global Risk Appetite still Very Weak:Hide in government bonds or be brave and buy cheap equities ?
Investors , in general, have been hiding
Source: Credit Suisse (7/2008)
Risk indexGlobal Risk Appetite Since 1981
10
Risk Appetite:Global Emerging Markets/Asia vs US
GEM/Asia at ‘panic’ levels, whereasUS has recovered somewhat
Source: Credit Suisse (7/2008)
GEM/Asia Equity Risk Appetite Index US Equity Risk Appetite Index
11
Significant Flows out of EM Asia:Precursor to Asian recession … or … other reasons?
Recent selling likely caused by de-risking by foreign investors and switching out of Asia to other OECD and EM markets
Note: EM Asia here includes India, Indonesia, Korea, Taiwan, Thailand and the Philippines.Source: Morgan Stanley (7/2008)
(5.8)
(12.9)
(15)
(5.4)
0.7
(18)
2.6
(15)
(20)
(18)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
-
2
4
6
8
10
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Monthly Net Foreign Buying in EM Asia
(US$bn)
12
Current Concerns in Equity Markets:‘Perfect storm’ of negative expectations!
With so many ‘fears’, is there room for being a contrarian ?
Fear of oil prices climbing to $ 200/bbl
Fear of economic stagflation
Fear of global and regional inflation rates remaining high, inducing OECD Central banks to potentially make a mistake by tightening policy too soon and by too much
Fear of further significant capital required to re-capitalise the US and UK/European financial systems > dilution to current shareholders
Fear of losing money by investing in equities in the short-term, despite more attractive valuations
13
Asia vs World:Relative performance over past decade(As at June 30, 2008)
After this year’s short-term setback, Asia’s out-performance is expected to continue
-22.1
-7.7
16.820.2
11.1
-11.7 -12.5
6.910
2.6
-25
-20
-15
-10
-5
0
5
10
15
20
25
YTD 1 Year 3 Years 5 Years 10 Years
(%)
MSCI AC Asia ex JP Index
MSCI World Index
Source: Bloomberg (7/2008)
MSCI Price Returns – Annualised (in USD terms)
14
Our Key Long-Term Views:Secular Asian equity bull trend, interrupted
Asia – Positive long-term fundamentals remains intact
Secular growth driven by domestic demand
Supportive liquidity – excess domestic savings, healthy banking system
Attractive equity valuations, and lowly-geared corporate balance sheets
Short-term issues – 1) Have oil prices peaked; and 2) Has the US equity market bottomed ?
15
Barings’ Base Case Scenario:Cautiously optimistic
Potential upside risk in equity markets in H2 ?
Long-lasting and severe US recession ? Barings forecasts flat growth
Asian economies’ GDP growth to slow ? Mid-term cycle correction in long up-cycle, but no recession
China’s PBOC to ease off on monetary tightening in H2 ’08 as inflation appeared to have peaked ? Recent signals appear more positive
Equities becoming more attractively priced, but risk aversion remained high and excess liquidity allocated towards equities was low: We are looking for a change in sentiment
16
US Financial Crisis:An update of our check-list
Positive newsflows still lacking!
Conditions for Market StabilisationCurrent status in
the US
Weakening currency
Monetary easingNow neutral
Bottoming out of housing sectorNot quite there yet
Re-capitalization, if not nationalization, of financial institutions Not quite there yet
Clearance in credit marketsNot quite there yet
Share price stabilization on earnings downgradesNot quite there yet
17
Oil Price:Where are we in the long cycle ?
It appears that the oil price is close to reaching a long-term peak
Source: Credit Suisse (7/2008)
Real Oil PriceOil Price (in real terms)
18
World Oil Demand:Who consumes more (or less) in 2008 (mm bbl/day)?
Recent slowing of Chinese and other economies, plus substitution effects, are expected to cause slower demand growth for oil
Source: JP Morgan (7/2008)
0.410.33
0.24
0.120.08 0.05 0.05
0.01
(0.49)
China MiddleEast
LatinAmerica
OtherAsia
FSU Pacific(Japan)
Africa Europe NorthAmerica
0.50
(0.50)
0.00
Mm bbl/day
19
Global Retail Petrol Prices:China vs rest of world (price in US$/litre)
Despite subsidies, pricing gap between China and US is narrowing
Source: JP Morgan (7/2008)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Nor
way
Den
mar
k
Ger
man
y
Brit
ain
Fra
nce
Hon
g K
ong
Sou
th K
orea
Sin
gapo
re
Bra
zil
Japa
n
Phi
lippi
nes
Indi
a
Tha
iland US
Rus
sia
Chi
na
Indo
nesi
a
Mal
aysi
a
UA
E
Sau
di A
rabi
a
Iran
Ven
ezue
la
US$/litre
20
China & Asia’s Core vs Headline Inflation:Headline: worrying …………..… Core: still tame
Chinese headline inflation appeared to have peaked, but other Asian counterparts still at high levels
Source: Morgan Stanley (7/2008)
Asia ex-Japan China
-1
0
1
2
3
4
5
6
7
8
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
YoY %
CPI Core CPI
(2)
-
2
4
6
8
10
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
CPI Non-food CPI
YoY %
21
Inflation in China:Food vs non-food
Food price inflation holds the key to China’s inflation
Source: JP Morgan (7/2008)
0%
5%
10%
15%
20%
25%
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08
CPI - Food CPI - Non-food
CPI - Food
CPI – Non-Food
YoY%
22
Food Price Inflation in China:Pork price holds the key
Pork price still high, but price trend has flattened out
Source: JP Morgan (7/2008)
10
12
14
16
18
20
22
24
26
28
30
32
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Pork price
Pork price
Pork price
(RMB/kg)
10
12
14
16
18
20
22
24
26
28
30
32
10
12
14
16
18
20
22
24
26
28
30
32
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Pork price - 2007
Pork price - 2008
Pork price - 2006
(RMB/kg)
23
China’s Key Macro Variables: Past over-heating periods vs now
Current cycle milder than past over-heating episodes: no need for aggressive tightening by PBOC ?
Source: JP Morgan (7/2008)
40.0%
35.0%
47.0%
20.0%
29.0%26.0%
49.0%
40.0%
58.0%
42.0%
76.0%
19.0%18.0%15.0%
25.0%
1.7%
Money (M2) Growth Loan Growth Fixed Asset Investment Growth Non-food Inflation
84-85 88-89 93-94 Now 84-85 88-89 93-94 Now 84-85 88-89 93-94 Now 84-85 88-89 93-94 Now0
10
20
30
40
50
60
70
80
Growth Rate (% p.a.)
24
Profit Outlook of Asia vs US:Fundamental factors continue to favour Asia
Stable Asian earnings revisions vs US down trend
US: Down revisions still dominate Asia Pacific Ex-Japan: Stable revisions
Source : JP Morgan (7/2008)
EPS index(2008/09: starting at 100 on base date of February ‘07)
95
100
105
110
115
120
125
130
Feb 07 May 07 Aug 07 Nov 07 Feb 08 May 08
2008
2009
Index
85
90
95
100
105
110
115
Feb 07 May 07 Aug 07 Nov 07 Feb 08 May 08
2008
2009
Index
25
Earnings Growth vs Valuations:Consensus expectations for Asia and the World
More sustainable earnings growth expected in Asia/EM,yet valuations of the latter still cheaper than US
* Excludes AustraliaSource: Goldman Sachs, IBES (7/2008)
World
P/E (E) EPS Growth (%) Div. Yield ROAE (%)
2008 E 2009 E 2008 E 2009 E 2008 E 2008 E
12.2 10.6 10.8 15.6 3.2 15.4
US 13.8 11.5 8.4 19.9 2.3 16.8
Emerging Markets 11.5 10.0 19.5 14.6 3.2 18.8
Asia Ex-Japan * 12.6 10.9 9.8 15.8 3.1 15.6
26
Asian Equities vs Asian Bonds: Equities appear very cheap, but ……
….. higher investor confidence and risk appetite needed to close the gap
Source: Morgan Stanley (7/2008)
APXJ Price
-6
-5
-4
-3
-2
-1
0
1
2
3
4
Apr-95 Apr-97 Apr-99 Apr-01 Apr-03 Apr-05 Apr-07
-
100
200
300
400
500
600
700
10Y Bond Yield - Fwd Earnings Yield (%) Avg. -1 Std dev
Avg. +1 Std dev US$ Price (Right)
(%)
27
Asia Pacific ex Japan Equity Markets:Price and P/E trends
Attractive valuation
Source: Morgan Stanley (7/2008)
MSCI AC Asia Pacific ex Japan (Price Index vs P/E Band)
MSCI Price Index
0
100
200
300
400
500
600
700
800
900
Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07
25x
22x
19x
16x
13x
28
Is the US Equity Market Close to the Bottom?Past 150 years’ cycle study say ……
….. probably Yes !
Source: Credit Suisse (7/2008)
US Real Equity Returns: Declines from Peak
Index of Real Return
29
Asia Pacific Fund’s Portfolio Strategy
What has changed? Investors’ risk appetite has weakened further as equity investors were hit by four
factors: oil price spike, stagflation, the US financial crisis, and monetary tightening bias in growth economies of BRIC
Signs of “capitulation” selling in Asian equities in June/July We have lowered the portfolio’s beta and active risk over the past 6 months
What has not changed? Portfolio favoring large caps and stable growth to cyclical growth Portfolio still focused on sectors with a sustainable growth trend, including
domestic consumption, infrastructure and asset reflation Portfolio looking to add back selective growth stocks in periods of severe market
weakness, as it seems that we are close to an important market low
30
Important Information
This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate serving as the Asia Pacific Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.
This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset Management group companies, their affiliates and/or their directors, officers and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. The contents of this document are based upon sources of information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This document may include forward-looking statements, which are based upon our current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance will not necessarily be repeated. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or developing markets. Compensation arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available.
Private investors in the Company referred to herein should obtain their own independent financial advise before making investments. This document must not be relied on for purposes of any investment decisions. Before investing in the Company, we recommend that all relevant documents, such as reports and accounts and prospectus should be read, which specify the particular risks associated with investment in the Company, together with any specific restrictions applying and the basis of dealing. The Company may not be available for investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document and other material relating to the Company and accordingly recipients of any such documents are advised to inform themselves about and to observe any such restrictions.
Complied (Boston): August 1, 2008