Transcript Notre Dame - Asia Pacific Fund

The Asia Pacific Fund, Inc.
Investment Community Conference Call
Baring Asset
Management (Asia)
Limited
19/F, Edinburgh Tower,
15 Queen’s Road Central,
Hong Kong
Tel +852 2841 1411
Asian Investment Outlook
www.asiapacificfund.com
www.barings.com
Khiem Do
Authorised and regulated by the
Financial Services Authority
October 29, 2008
Table of Contents
Page
Section 1: Asian Markets Review
2-4
Section 2: Global and Asian Investment Outlook
5 - 15
Appendix: Can China Save the World ?
16 - 25
1
Section 1
Asian Markets Review
Baring Asset
Management (Asia)
Limited
19/F, Edinburgh Tower,
15 Queen’s Road Central,
Hong Kong
Tel +852 2841 1411
www.barings.com
Authorised and regulated by the
Financial Services Authority
Asian Stock Markets: Country Performance
(Year-to-date to October 24, 2008)
Country - Index
Gross return in USD
(%)
North Asia
MSCI Taiwan Free
MSCI Hong Kong Free
MSCI China Free
MSCI Korea Free
-46.6
-55.7
-62.8
-66.1
ASEAN
MSCI Malaysia Free
MSCI Thailand Free
MSCI Philippines Free
MSCI Singapore Free
MSCI Indonesia Free
-45.3
-50.4
-51.7
-55.1
-57.6
MSCI AC Far East Free Ex Japan Gross
-58.1
MSCI India Free
Vietnam (HCM Local price index)
-68.5
-62.8
Source: Factset, Bloomberg
3
Asian Stock Markets: Sectoral Performance
(Year-to-date to October 24, 2008)
Sector
Gross return in USD
(%)
MSCI Utilities
MSCI Telecommunication Services
MSCI Information Technology
MSCI Consumer Staples
MSCI Financials
MSCI Consumer Discretionary
MSCI Real Estate
MSCI Health Care
MSCI Energy
MSCI Materials
MSCI Industrials
-38.0
-48.7
-52.4
-54.4
-56.6
-58.4
-60.9
-62.7
-66.4
-67.1
-69.3
Source: Factset
4
Section 2
Global and
Asian Investment Outlook
Baring Asset
Management (Asia)
Limited
19/F, Edinburgh Tower,
15 Queen’s Road Central,
Hong Kong
Tel +852 2841 1411
www.barings.com
Authorised and regulated by the
Financial Services Authority
Risk Aversion Soared:
Implications of a freeze-up in the Global Banking system
Will global action succeed
in thawing the frozen banking system ?
Source: BCA Research (10/2008)
6
Global Risk Appetite still Very Weak:
Hide in cash/government bonds or buy cheap equities ?
Global Risk Appetite Since 1981
Risk Index
10
Euphoria
5
0
Panic
Latest = -4.56
(17 Oct 08)
-5
01/81
01/85
01/89
01/93
01/97
01/01
01/05
Investors , in general, have been hiding in cash
Source: Credit Suisse (10/2008)
7
Significant Flows out of EM Asia:
Unprecedented, continuing selling
Net Foreign Flows in
EM Asia (ex-China & Malaysia)
10
Net Foreign buying/selling in
EM Asia (ex-China and Malaysia)
(US$bn)
5%
4%
2.6
5
0.7
3%
2%
0
1%
0%
-1%
-2%
-3%
-4%
Monthly Net Foreign Buying in EM Asia
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
-5%
Jan-97
Jul-08
Jan-08
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
-20
Jul-07
-18.3
-15
-14.8
-15.2
-10
-12.9
-10.3
-8.3
-8.5
-5.4
-5
EM Asia ex-China & Malaysia
Significant de-risking and de-leveraging by global investors
Note: EM Asia here includes India, Indonesia, Korea, Taiwan, Thailand and the Philippines.
Net Foreign Buying in EM Asia – Source: Morgan Stanley (10/2008)
Net Foreign Buying in EM Asia ex-China & Malaysia – Source: Credit Suisse estimates (10/2008)
8
Our Key Long-Term Views:
Still positive on Asia
Asia – Positive long-term fundamentals remain intact

Secular growth driven by domestic demand

Supportive liquidity – excess domestic savings, healthy banking system

Very attractive equity valuations, plus conservative corporate balance sheets
Three short-term issues:
1) Normalisation of the Western banking system: when ?
2) Global recession: how deep and how long ?
3) US equity market: when will it bottom ?
9
Barings’ Base Case Scenario:
Still ‘cautiously’ optimistic

Flat to low OECD GDP growth in 2009

Mid-term correction in a long up-cycle in Asia, but no recession

Chinese government and PBOC have already started to reflate, more to
come

Looking for an upturn in sentiment in the equity markets within the next
3-6 months
Potential upside in equity markets higher than
downside risk on a 1 to 2 year view
10
Asian vs US Financials:
‘Chalk and cheese’
Do Asian banks deserve the same share price treatment
as their US counterparts ?
Source: Bloomberg (9/2008)
11
Commodities Correction:
How deep ?
Demand Destruction Underway
More Downside to Come
Positive for Asian inflation and interest rates
Source: BCA Research (10/2008)
12
Earnings Growth vs Valuations:
Consensus expectations for Asia and the World
P/E (E)
EPS Growth (%)
Div. Yield
ROE (%)
2008 E
2009 E
2008 E
2009 E
2008 E
2008 E
World
8.5
7.6
3.1
11.1
4.4
15.5
US
9.7
8.6
6.1
12.4
3.3
17.1
Emerging Asia *
8.1
7.3
1.4
11.1
4.7
15.4
More realistic earnings growth expected in Asia vs US,
and Asian valuations are offering attractive investment entry level
* Excludes Australia, HK and Singapore
Source: JPM, IBES (10/2008)
13
Asian Equity Markets Valuation:
Lowest over past 18 years !
Credit Suisse’s Asian Markets 6 Factor Valuation Indicator
Asia ex-Japan Historic P/E
40
30% overvalued
20
1400
Fairly Valued
0
1000
05-Sep-08
-20
600
"Buy" signal
200
Jan-93
Jan-96
6-Jun-06
11 May 04
19-Oct-05
20-Apr-05
Jan-99
Jan-02
Jan-05
Jan-08
-40
6 factor Asian valuation indicator
Price Index
1800
Jan-90
30
60
2200
25
20
15
10
5
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-05
Jan-08
Asia ex-JP - PE
Fundamental ‘Buy’ signal hoisted, based on very cheap valuation
Source: Credit Suisse (10/2008)
14
Concluding Remarks:
Stay defensive for now, and looking for re-entry points
 We expect to see more policy action
 In the meantime we remain cautious
We remain defensive, focusing on quality stocks with strong valuation
support
 But opportunities will present themselves
Looking to accumulate stocks with distressed valuation and high net free
cash flow
15
Appendix:
Can China Save the World ?
Baring Asset
Management (Asia)
Limited
19/F, Edinburgh Tower,
15 Queen’s Road Central,
Hong Kong
Tel +852 2841 1411
www.barings.com
Authorised and regulated by the
Financial Services Authority
The Emerging World:
Share of World GDP – Long-Term Perspective
Contribution to world growth (pp)
Share of world growth (%)
7%
80%
Developed countries
Emerging markets
Emerging growth share (right scale)
6%
70%
60%
5%
50%
4%
40%
3%
30%
2%
20%
1%
10%
0%
0%
1960
1970
1980
1990
2000
The emerging force of the Emerging World !
Source: UBS (8/2008)
17
China vs Other Emerging:
Share of World GDP (in 2005 Dollars)
Emerging share of global GDP (2005 dollars, %)
40%
Other emerging markets
35%
China
30%
25%
20%
15%
10%
5%
0%
1960
1970
1980
1990
2000
China’s economic importance has been steadily rising
Source: UBS (8/2008)
18
China And Other Emerging:
Share of World GDP in 2007 (in current 2007 dollars)
World (2007 PPP) = US$65.0 tn
Emerging (2007 PPP) = US$30.8 tn
World (2007) = US$54.3 tn
Emerging (2007) = US$17.2 tn
Brazil
3%
Brazil China
2%
6% India
2%
Russia
2%
Europe
31%
Other
emerging
19%
Other
developed
4%
Japan
8%
US
26%
Emerging: 31% …. Developed World: 69%
Europe
21%
China
11%
India
5%
Russia
3%
Other
developed
3%
US
21%
Other
emerging
26%
Japan
7%
Emerging: 48% …. Developed World: 52%
Source: UBS (8/2008)
19
Contribution To World GDP Growth:
The rise of China and other emerging
Contribution to world GDP growth
(‘blended’ weights – PPP and 2007 dollars)
7%
Developed countries
China
Other emerging markets
6%
5%
4%
3%
2%
1%
0%
-1%
1960
1970
1980
1990
2000
4.3% GDP growth in 2007: China 0.8% , Other EM: 1.8% , Developed: 1.7%
Source: UBS (8/2008)
20
China’s Place In The Developed World:
Consumption vs Investment/Exports share
% of China to US + EU27 + Japan (2006)
China (as a percentage of the developed world*)
35
30.7
30
25
20
17.0
15
10
8.6
6.4
5.0
5
0
GDP
Private consumption
Government
consumption
Fixed investment
Exports
China claims a big share of the world’s exports
and CAPEX spending
* using the US, Japan and 27 European countries as a proxy for the developed world
Source: Credit Suisse (8/2008)
21
Drivers Of China’s GDP Growth:
CAPEX and, recently, net exports
% of total GDP
60
25
(Contrib to GDP growth, in %)
50
40
30
20
10
0
20
15
10
5
0
-5
-10
-10
1978
1981
1984
1987
1990
Net Export
Gross Capital Formation (GCF)
1993
1996
1999
2002
2005
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Consumption: Government
Consumption: Household
Consumption: Government
Consumption: Household
Gross Capital Formation (GCF)
Net Export
Private consumption, though rising, has not
been as powerful as the growth in CAPEX
or net exports
How strong will the government boost
domestic demand to offset a potential nil or
negative contribution of net exports in ’09 ?
Source: Lehman (8/2008)
22
China’s Fixed Asset Investment Growth:
More volatile growth
YoY Growth (%)
45
40
35
30
25
20
15
10
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Nominal fixed-asset investment
Sep-06
Mar-07
Sep-07
Mar-08
Real fixed-asset investment
Chinese government’s principal tool for managing GDP growth !
Source: Lehman (8/2008)
23
China’s Retail Sales:
Steady growth
YoY Growth (%)
22
20
18
16
14
12
10
8
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Real retail sales
Jul-06
Jan-07
Jul-07
Jan-08
Nominal retail sales
Steady 12-13% annual growth in real terms
Source: Lehman (8/2008)
24
Can China Save The World ?
No, but ……..

China has the flexibility of fiscal and monetary levers

China’s banking system is healthy and liquid

China’s inflation and interest rates are easing

China’s medium-term GDP growth expected to remain solid (8-10% p.a.)

Hence, China (and other Emerging nations) can help to smooth out the
decline in global GDP growth
25
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
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Complied (Boston): October 27, 2008
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