Asia caught the technology bug in a big way. The sector's ascent has been
hypnotic in its speed and the level of gains. A whole investment cycle has
been compressed into about six months.
The internet IPO market has provided the most thrills although telecoms
and outsourcers, such as wafer fabricators, have also done well.
With the Nasdaq now correcting, investors are having to think for the
first time about what they have been buying. In the case of concept stocks,
it is often not very clear. On the way up, investors asked few questions,
and momentum looked after the rest.
Now valuation is an issue.
The more concept-driven the stock, the less anyone can say what a fair
price is. When sentiment reverses, the hollowness of arguing valuations on
the basis of revenues, which has been readily accepted, becomes evident.
The racier companies are going to consume a lot of cash just finding
customers. Moreover, with no lock-in clause for the venture capitalists who
are seeding them, there is the prospect of secondary issues just months
later.
The issues of quality and over-supply have seen increasing numbers of
investors ask whether many of Asia's tech offerings are sustainable.
The broad technology-media-telecoms sector is as much as 50 per cent of
some regional indices – a far higher proportion than in the S&P 500.
If they unwind a small fraction of that, the web of tech stock
cross-holdings will start to reverse, forcing the retail margin players
against the wall. It could be vicious.
Aberdeen has tacked a sceptical course toward tech stocks from the start
because, once the hype is stripped out, we have been unable to reconcile
valuations with attendant risk.
More than that, Asia's old economy looks startlingly good value. The
region is barely into an expansionary cycle – unlike the West. Rather than
bottom-fishing for value stocks that might turn out to be cheap for good
reason, we have been investing in real growth.
Many companies, especially small and medium caps in the value-play markets
where tech has little or no representation, have looked especially
promising.
The speculative transfer of investment into the tech arena has added to
our perception of neglect. Yet earnings are recovering strongly, interest
rates are still low, and business confidence is reviving.
The stocks we favour range across markets and capitalisation. However, our
filters aim to isolate the well- managed ones, with business focus and
clean balance sheets.
Generally, we favour countries such as India and those in Australasia.
They are seeing economic recovery broaden, with improved external
performance and liquidity positions.
There are queries over ongoing institutional reforms and the stability of
financial sectors, which are necessary for corporate sector restructuring.
Growth prospects are still dependent on government willingness to
restructure. But stocks look cheap, with price/ earnings ratios in the low
teens in some cases, and downside risk discounted.
Overall, the end of the first quarter has left Asia's new economy stocks
on top, but only just. The Nasdaq is causing anxiety. Renewed US interest
rate fears and valuation concerns have sparked talk of a bigger correction.
Given technology's correlation across markets, volatility is likely to
increase, not abate.
The fact that we are invested mainly in areas dubbed old economy is more
emotive than descriptive. It is simply a question of paying the right price
for growth.
