The party had to end sometime: After a several-year run of explosive growth, Asian markets-particularly China and India-have hit the skids. Now what? Don't expect a sharp rebound anytime soon as the region works through some issues, said a panel of Asian fund managers Thursday at the Morningstar Investment Conference in Chicago. But they say the long-term outlook remains bright even if the near-term picture is cloudy.
"The problems in Asia are fundamentally different from the West," said Anthony Cragg, managing director and senior manager of emerging markets and Asia/Pacific for Wells Fargo. "They don't have mortgage problems or credit debt up to their eyeballs. But they do have inflation; India's rate is 11.5%. Inflation is the devil in Asia."
Justin Leverenz, portfolio manager of the Oppenheimer Developing Market Fund, pinned part of Asia's problems on its collective unwillingness to adjust its currencies to global economic realities. He said that China, for example, is experiencing high-single-digit inflation because its exchange rate seriously undervalues its currency. That boosts inflation and potentially undermines growth.
India's inflation problem is more structural in that it doesn't have enough infrastructure to support the 8% to 9% annual GDP growth of recent years, said Sharat Shroff, lead manager of the Matthews Pacific Tiger fund and co-manager of the Matthews India fund. He said India faces a couple of other problems due to its sizable current account deficit and a growing fiscal account deficit, the latter caused by various economic stimulus measures.
"India may be vulnerable over the next several months," Shroff said, "but we have a five-year outlook."
Elsewhere in Asia, Cragg has become a bigger fan of Japan. "It's seen as the old lady of Asia and an unfashionable investment," he said. But he cites its roster of forward-thinking global companies such as Toyota, as well as a number of mining-related companies that are investing in natural resources projects around the globe. He added that roughly half of Japanese companies are trading at less than one times book value.