Market Outlook and Investment Strategy

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Transcript Market Outlook and Investment Strategy

Baring Asset
Management Limited
155 Bishopsgate,
London EC2M 3XY
Tel +44 (0)20 7628 6000
Fax +44 (0)20 7638 7928
www.barings.com
Authorised and regulated by the
Financial Services Authority
The Greater China Fund, Inc. and
The Asia Pacific Fund, Inc.
Market Outlook and Investment
Strategy
June 2009
Asia vs World:
Relative performance over past decade
(May 31, 2009)
MSCI Total Returns (in US$ terms)
80
(% )
64.7
60
40
20
36.5
40.5
47.0
33.7
25.3
20.7 23.2
17.715.3
10.0
9.6
7.2
33.8
24.8
16.2
0
-8.3
-19.5
-20
-3.8
-16.5
-40
-60
YTD
-40.3
-52.2
2008
2007
-7.8
-12.9
-35.2
2006
MSCI AC Asia ex JP Index
2005
2004
2003
2002
2001
2000
-40.3
1999
1998
1997
MSCI World Index
After 2008 setback,
Asia’s out-performance is expected to continue
Source: Factset as at 31 May 2009
1
Asia vs World:
Long term performance
MSCI Total Returns (in US$ terms)
120
(% )
96.4
100
80.4
80
60
40
20
13.4
5.5
1.3
0
-8.0
-20
-20.5
-40
-18.2
-22.3
3 Years
MSCI AC Asia ex JP Index
5 Years
MSCI World Index
10 Years
MSCI US Index
Asia is the clear long term winner
Source: Factset as at 31 May 2009
2
How Asia has transformed itself:
Pre- and post-financial crisis
Pre- 1997
Post- 1998
Deficit
Surplus
Overvalued
Undervalued
High
World’s major lender
Leverage
Excessive
Deleveraging
Capacity expansion
Excessive
Disciplined
Falling
Rising
Premium
Discount
Exports
Consumption
Current account
Currency
Foreign borrowing
Corporate RoE
Relative valuation
Growth driver
Derivative of global growth
Driver of global growth
More sustainable growth post restructuring
3
Asia’s Balance Sheet Revisited:
Healthy
Asian corporate debt levels are close to 25 year lows
Asian banks have capacity to lend
90%
100%
Asia ex-Japan Net Debtto-Equity Ratio
80%
GDP-wgt Loan-to-Deposit Ratio
(major financial institutions)
95%
70%
90%
60%
85%
50%
40%
80%
30%
75%
20%
70%
10%
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008E
The external position of Asia is healthier today than
20 years ago in terms of current account balance...
8
6
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
... as well as external debt levels
% of GDP
% of GDP
Asia ex HK/Sing Total
External Debt as % of GDP
Asia ex HK/Sing Current Account Balance as % of GDP
31
4
26
2
0
21
-2
-4
16
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Data prior to 1995 excludes Taiwan
Data prior to 1995 excludes Taiwan
It is most likely that Asia can weather this storm well
Source: Citi (6/2009)
4
Ten years after crisis, restructured & ready to pounce!
Rising returns on equity
ASEAN corporates now recognise the importance of ROE and are focused on
sustaining and increasing returns to shareholders
Indonesia
Malaysia
(% ) 40
3.8
4.5
30
3.0
3.5
20
2.5
10
1.5
0
5.5
(x)
0.5
Dec 96
Jan 99
Feb 01
P/B (x, LHS)
Mar 03
Apr 05
May 07
-10
Jun 09
(% ) 17
0.6
Dec 96
14
11
8
5
2
-1
-4
-7
Jun 09
2.2
1.4
ROE (%, RHS)
Philippines
4.0 (x)
3.6
3.2
2.8
2.4
2.0
1.6
1.2
0.8
0.4
Dec 96
(x)
Jan 99
Feb 01
Mar 03
Apr 05
P/B (x, LHS)
ROE (%, RHS)
Jan 99
Feb 01
Mar 03
Apr 05
P/B (x, LHS)
ROE (%, RHS)
May 07
Singapore
May 07
(% ) 18
3.0
12
2.4
6
1.8
0
1.2
-6
Jun 09
(x)
0.6
Dec 96
(% 18
)
15
12
9
6
Jan 99
Feb 01
Mar 03
Apr 05
P/B (x, LHS)
ROE (%, RHS)
May 07
3
Jun 09
Source: CSFB as at June 2009
5
Chinese Economy:
Sustainable GDP Growth
Real GDP Growth (Year-on-year Percentage, %)
16
%
CREDIT
TIGHENING
14
12
9% swing
10
4% swing
10% swing
8
6
4
2
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0
Sustainability preferred to boom and bust
Source: BCA Research, JP Morgan as at May 2009, Bloomberg
6
China
Fiscal policy has a lot of room to expand
% of GDP
% of GDP
1.0
20
0.5
0.0
15
-0.5
-1.0
10
-1.5
-2.0
5
-2.5
-3.0
-3.5
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
Govt Surplus (Deficit)
Govt debt (RHS)
Source: CEIC, Credit Suisse estimates as at May 2009
7
China:
Recent PMI and domestic property sales
PMI new orders up faster than PMI
finished good inventory
0
8
-5
6
PMI :New Order
PMI: Finished Goods Inventory
0
PMI: New Order - Finished Goods Inventory (RHS)
Source: (left) CITICS as at May 2009 and (right) Goldman Sachs as at May 2009 (Primary market — Beijing, Tianjin, Shanghai, Hangzhou,
Guangzhou, Shenzhen, Chengdu, Chongqing, Wuhan and Nanjing)
8
Mar-09
Jan-09
Jan-09
Jan-08
Nov-08
Jan-07
Sep-08
Jan-06
2
Jul-08
-20
May-08
30
Jan-05
4
Mar-08
-15
Jan-08
35
Nov-07
-10
Sep-07
40
42%
59%
Average 08
59%.
transaction vol.
Jul-07
45
Average
YTD09 vol.
10
May-07
5
50
Average Mar 06-Dec06
Average 07 transaction vol.
transaction vol.
Mar-07
55
10
12
Jan-07
15
Nov-06
60
14
Sep-06
20
Jul-06
65
mm sqm
May-06
Index
Mar-06
Index
Property sales volume improving in
primary market
Corporate Earnings Growth:
Downgrades bottoming out
US:
Earnings Revisions Index
Asia Pacific ex-Japan:
Earnings Revisions Index
120
120
110
110
100
100
90
90
80
80
2009
2010
2009
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Feb-08
Apr-09
Feb-09
Dec-08
40
Oct-08
50
Aug-08
50
Jun-08
60
Apr-08
60
Feb-08
70
Apr-08
70
2010
Room for upward surprise in 2009 ?
Source: JP Morgan (6/2009)
9
Asian Equities’ Valuations
Valuations not at extremes, earnings revisions
the key
P/E (x)
Div. Yield
(X)
P/BV (x)
Earning growth (%)
ROE (%)
Country
Current
Trailing
12m fwd
Current
Trailing
Current
Trailing
2008E
2009E
2010E
2009E
Global *
12.4
13.1
3.3
1.6
-9.4
-18.1
18.7
11.2
USA *
18.5
14.3
2.4
2.0
-22.1
-9.8
22.5
11.8
EMF Asia
15.2
14.4
2.3
1.8
-20.2
-6.8
24.5
11.4
China
14.6
13.8
2.7
2.0
-8.7
-2.0
17.3
13.5
Korea
15.8
13.8
1.4
1.3
-34.0
-1.8
38.1
8.0
*
Market forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using I/B/E/S estimates. US trailing PE is calculated as
per reported earnings. For all other markets and sectors, forecast numbers are derived from bottom-up calculations of each individual MSCI constituents using
JPM estimates for covered stocks and I/B/E/S estimates for the rest. Companies with different yearends are calendarised to December yearends and are free
float adjusted for aggregation. Historical numbers are from MSCI.
Source: JP Morgan (6/2009)
10
Asia and China
Strategy and Outlook

Massive monetary injection stabilises liquidity environment and asset prices

Little evidence of sharp broad based recovery yet selected regions and industry segments stand a good
chance to see growth re-accelerating

Asian economies and consumers are underleveraged with China continuing to drive growth and reflation
in the whole Asian region

Markets will re-focus on secular and above market earnings growth following the strong share price
rebound from distressed valuations

Our high alpha approach seeks to capture the best opportunities in the region through companies with
the most attractively priced growth
11
Asia and China
Strategy and Outlook
Asia Pacific Fund



Country - Overweight China, Taiwan, Singapore and Indonesia

Prefer secular growth to cyclicals. Underweight defensives
Sector – Overweight Financials and Energy
Key themes : Chinese domestic consumption, regional asset reflation, return of liquidity in Taiwan, energy and
niche growth technology
Greater China Fund


Prefer China to Hong Kong




Quality China properties stock benefit from government policy support and market recovery
Look for beneficiaries of strong infrastructure spending and stimulus package – construction companies and
building materials
Bombed out cyclical stocks – material and technology – to lead early rally in restocking expectation
Focus on market leaders which play consolidator roles and with restructuring angle
Stock selection focus switching from valuation support to earnings delivery following the strong share price
rebound from distressed levels
12
The China and Asia Conundrum

What is the share of China and Asia ex-Japan in the world’s economy five
years from now?

What is the potential size of the Chinese economy compared to Japan?

What is China and Asia ex-Japan’s market capitalization relative to that of the
US?

What was Japan’s market capitalization relative to that of the US in 1990?

How are you positioned in China and Asia ex-Japan? Is it consistent with your
economic view?
13
Asia and China
The World’s Biggest “Underweighting”
Asia in the World
2009
Region
May 2009
Population
GDP
Market Cap.
% in total
% in total
% MSCI
North America
5.1%
28.2%
48.3%
Developed Europe
7.7%
29.2%
26.7%
Asia
50.1%
26.5%
20.2%
Australia
0.3%
1.6%
2.8%
China
19.9%
8.7%
2.0%
Japan
1.9%
9.3%
9.9%
CEEMEA
4.9%
5.6%
2.4%
LatAm
6.9%
5.2%
2.4%
Others
25.2%
5.0%
0.0%
Global
100.0%
100.0%
100.0%
Source: JPM as at June 2009
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Important Information –
Regulatory Disclosure
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 Greater China Fund/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 from
third party sources which are 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. 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
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Compliance (Boston): June 10, 2009
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