Title: THE ASIA PACIFIC FUND, INC. Asian Investment Outlook
1THE ASIA PACIFIC FUND, INC.Asian Investment
Outlook
February 2007
2Asias long-term outlook
- Strong economic growth, boosted by rising
domestic consumption - Improving corporate returns
- Undervalued currencies, fair value markets
- Secular re-rating expected to continue
- Asia its harvest time !
3Have Asian markets returned to the Bull
Super-cycle?
- Year Yearly Returns Volatility of
returns (in terms) - 2003 45.0 16.3
- 17.6 14.4
- 21.8 15.4
- 32.2 12.5
Note MSCI AC Far East Free ex Japan index
returns (in , USD, gross terms)
Source Baring Asset Management (1/2007)
Double digit annual returns, decreasing
volatility the best of both worlds !
4Out-performance of AsiaSecular re-rating
continued in 2006
Asia outperformed over the last five years
Source HSBC (12/2006)
Asias out-performance is expected to continue
5Asia-5 From Crisis to Solid Recovery
Asia-5 Current Account, bn
Asia-5 Fixed Investment of GDP
Asia 5 Korea, Thailand, Philippines,
Indonesia, Malaysia
Source Credit Suisse (11/2006)
Stronger discipline on CAPEX spending producing
a healthier current account balance
6The global importance of Asia
Share of US Euroland Asia World
GDP 22 16 31 Official Reserves 1 8 50 Stockmarke
t Capitalisation 40 18 10
Excludes Japan
Source Goldman Sachs Dec 06, based on end 2005
data
Gap between Asian market capitalisation and
strong economics to close in coming years?
7Asia De-coupling from the US?
The correlation between Asia US Industrial
Production growth trends has declined
US Share of Asian Exports Lower Than Past Cycles
Source Morgan Stanley (11/2006)
Not completely, but increasingly so
8Asia De-coupling from the US?
- Chinas and Indias strong and sustainable growth
have increasingly provided an economic buffer to
Asia - After seven years of belt tightening - since the
97-98 crisis - Asia has started to invest and
consume - Asias wealth has been rising thanks to strong
property, equity and currency markets - This renewed confidence will likely help the
domestic economy of Asian countries to lessen
their dependence on exports to the US
A decade of sustainable growth appears to have
commenced
9China Spending on big-ticket items, but
Sedan Sales in China
Property Prices in line with Income
Source Citibank (12/2006)
Source BNP Paribas Peregrine (12/2006)
- Strong growth in Sedan sales
10 Chinas savings ratio continued to rise !
Savings/GDP
Source CEIC, CLSA (8/2006)
Chinas income growth appears to grow at a faster
rate than consumption growth
11China has become a major lender (and
investor),while the US remains the worlds
largest borrower
Major capital exporters and importers ( of total)
Source UBS (11/2006)
Negative implications for the US dollar and
positive implications for Asian currencies and
gold?
12Barings Global forecasts for 2007
- US economy expected to grow more strongly in H2
07 - Europe expected to remain relatively buoyant, but
Japan more sluggish - G7 core inflation likely to remain around 2-2.5
- US monetary policy likely to remain on hold in
H1, but potential risk of renewed tightening in
H2 - Oil prices likely to trade between US 50-80 /bbl
Still a relatively benign global backdrop, but
direction of US monetary policy and oil prices is
key
13Barings Asia Pacific forecasts for 2007
- China expected to continue to grow solidly
(910) and drive the region - Other Asian economies likely to grow at long-term
trend rates - Asian central banks policy direction expected to
be mixed (Indonesia and Thailand to cut, China
and India to raise, while others to maintain a
status quo) - Asia Pacific currencies likely to continue to
strengthen modestly vs the USD
Still a favourable regional economic backdrop
14Asian Market Valuation At fair value
Based on H-Share Index
Source Goldman Sachs (12/2006)
Korea and Thailand are relatively cheap, while
India and China are relatively expensive
15Chinese equities Bubble in the making ?
- Similar to Japan (and Korea/Taiwan) in the 80s,
one notes Chinas deflationary boom
super-cycle, a strengthening Renminbi, massive
liquidity inflows, re-rating of cheap equity
market - China is undoubtedly THE growth story of this
decade - Non-believers in China appear to be gradually
converted - Each decade sees a bubble .. so is this
.. Chinas turn ?
16Chinese equities rally Heading towards a
bubble ?
change since Jan 02 for China Jan 82 for
elsewhere
Source Macquarie Bank (11/2006)
As with Japan, Korea and Taiwan in the 80s .
will a Chinese market bubble materialise?
17Chinese equities valuation Still reasonably low
PE ratios since Jan 02 for China Jan 82 for
elsewhere
PB ratios since Jan 02 for China, Jan 82 for Japan
Source Macquarie Bank (11/2006)
Compared to Japan, Korea and Taiwan in the 80s,
Chinese equities are nowhere near bubble
valuations yet
18Global risk appetite neutral
Source Crdit Suisse (1/2007)
Still in neutral zone, as economies and markets
appear to be at equilibrium levels
19What are the potential RISKS in 2007 ?
- Chinas inflation rising to 5-6 (due to high
food price inflation ?), forcing PBOC to tighten
monetary policy more aggressively - Serious trade embargo by US on China
- Severe US monetary tightening, leading to a
recession - Re-escalating tensions in the Middle East,
leading to much higher oil prices - Significant loss of risk appetite for equities
Risks are real, but deemed as low probability
events
20Asian Markets Outlook in 2007
- Consolidation in H1 after a strong Q4 06
- Medium-term prospects remain favourable, with
China expected to remain the centre of attraction - Korea and Taiwan could surprise on the upside in
H2 07 - Asian markets are expected to post another year
of positive returns in 2007
21Asia Major Investment Themes
- China consumption and the rise of the middle
class - Regional asset reflation Singapore, Indonesia,
Taiwan, Malaysia - Petro-dollar recycling Middle East construction
boom shipbuilding, oil services and
engineering - Re-construction of Asia engineering,
construction, building materials, capital goods - Improved supply side discipline of cyclical
sectors energy, materials, technology
Consumption, Asset Reflationand Re-construction
22Investment Professionals
KHIEM DO Chair of Asia Multi Asset Group Member
of Targeted Solutions Portfolio Construction
Group Hong Kong Investment Experience 30
years Khiem is responsible for the management of
a number of specific Asian portfolios, and all
Multi-Asset portfolios for clients located in
Asia. He was appointed to become a member of the
Strategic Policy Group, the companys global
macro research and asset allocation team in 2006.
Khiem was the Head of the Asia Pacific
Specialist Investment Team from 1997 through
2006. He has been a co-manager of the Baring
China Absolute Return (long-short hedge fund)
since July 2004. Khiem joined Baring Asset
Management in 1996 from Citicorp Global Asset
Management in Sydney, where he was the Australian
Chief Investment Officer, the chair of the
Australian Asset Allocation Committee, and a
member of the CGAM International Asset Allocation
Committee. Khiems prior experience includes
seven years at Bankers Trust Australia and seven
years at Equitilink Australia Ltd. Khiem received
his B.A. in Economics (Hons.) from Macquarie
University (Australia). He was designated an
Associate Member of the Securities Institute of
Australia (the Australian CFA equivalent) in
1979. Khiem is fluent in English, Vietnamese, and
French.
23Important 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 Funds 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 FSAs 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.
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) January 29, 2007
Disclosure for Board meeting only
Ensure Complied Date is added at foot of
Disclosure