Such higher prices are likely to contribute to a further softening of world economic growth, which has historically had a negative impact on exp- ort-dependant Asian economies. But we believe the region’s structural improvements, especially since the 1997/98 Asian financial crisis, are having a significant impact on economic and corporate performance. Standards of corporate management and governance are improving, meaning that companies are able to generate higher profits.It has often been the case that strong growth across the Asian region failed to bring commensurate return for investors. Companies were less focused on achieving appropriate returns for share- holders, instead concentrating on retaining earnings to invest in expanding capacity or non-core businesses. Companies that managed to survive the financial crisis learned important lessons which led to much greater emphasis being placed on shareholders’ interests. This change is emphasised in the fact that although GDP growth in Asia ex-China averaged 4.7 per cent from 1998 to 2004, stockmarket performance has been much stronger at an average of 9.2 per cent a year. China continues to remain an important factor for the region. Although it has grown at breakneck speed, this has not fed through into market performance. Domestic stockmarkets are still relatively undeveloped and, with the improvements in corporate practices seen elsewhere not yet fully seen in China, taking advantage of that growth remains a key issue in managing our portfolios. The pattern of strong GDP growth has not been reflected in Chinese stockmarket growth as it still follows the old Asian model. This is characterised by excessive capital spending, with an emphasis on building productive capacity rather than generating shareholder returns. We believe we can find better value by investing in companies with a base in other Asian countries but a strategic foothold in China. The increasing maturity of Asian markets means they are driven less by vagaries of the external environment. In these circumstances, country and sector selection – key sources of added value in the past – are now less imp- ortant than stock selection. In the past, the old model of Asian growth meant it was important to be able to gauge changes in the external envir- onment and then be able to choose sectors which would perform well in those circum- stances, for example, increasing exposure to the technology sector when world growth was picking up or raising exposure to defensive sectors when capital was flowing out of the region. With the region’s stockmarkets typically displaying exaggerated moves in response to the external environment, the timing of changes in sectoral exposure was a crucial influence on portfolio performance. That pattern is now changing. Such exaggerated swings in valuations have not occurred recently. As Asian markets mature, they are becoming better at discounting the future. In the past, Asian markets would often enter a period of slowdown on high valuations, leading to a double whammy for investors, whose returns would be diminished not only by earnings decline but also by valuation compression. However, current Asia ex-Japan valuations of 11 times expected 2005 earnings and a 3 per cent dividend yield provide downside support.