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The value of old Asia

Asia caught the technology bug in a big way. The sector&#39s 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&#39s 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&#39s 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&#39s 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&#39s 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.

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