Stock markets in South Korea, Taiwan and Hong Kong still offer the best value in the region despite a strong rally that sent two of those markets to multiyear highs, an Asia-Pacific strategist with Baring Asset Management says.
"It doesn't matter that stocks markets have risen sharply, as long as the fundamentals continue to make sense," Khiem Do, who manages the New York-listed Asia Pacific Fund, said in an interview.
South Korea, Hong Kong and Taiwan shares together make up around 89 percent of Do's US$183 million portfolio, which has a mandate to invest in the Asia-Pacific region -- except for Japan.
All three markets offer good valuations in relation to their corporate earnings outlooks, Do said. There's also a backdrop of healthy domestic economies and expectations of steady fund inflows, he said.
South Korea is the best performing market in the region so far this year, yet it is the most attractively valued at an average price of 8.5 times forecast earnings this year.
The Korea Composite Stock Price Index is up around 19 percent so far this year, extending last year's 11 percent gain.
Local investors' reallocation of funds from fixed-income instruments to stocks in South Korea is one reason for Do's confidence in the market.
"Corporate bond yields in South Korea have fallen and local investors are looking for alternative sources of investments. In the past, they used to be substantially invested in fixed income," he said.
Investment opportunities in bonds have lessened in South Korea because local companies aren't as compelled to issue bonds as many firms are sitting on excess cash.
Do is also positive on South Korea because of the dramatic improvement of return on equity (ROE) over the past seven years. From a negative return in 1998, local companies' average ROE is now approaching 15 percent, he said.
Taiwan's stock market offers a combination of good valuations and attractive dividend yields, Do said.
The TAIEX rose to 6,481.62 on Aug. 4, its highest in 15 months, on hopes of a second-half recovery in the technology sector. The market is trading at an average price of around 12 times forecast earnings for this year, while providing an average dividend yield of 4 percent.
"Taiwan is dominated by technology companies that are not well known for paying high dividend yields, but the rest of the market is paying good dividend yields," Do said.
"Technology is reasonably cyclical. In the beginning of this year there was an inventory problem relative to demand. But that inventory has been depleted to the point that technology companies have to now produce more," he said.
Do expects global demand for technology products and services to hold up at least until December.
"If Christmas sales are strong, and if that continues into the first few months of next year, then the technology sector will do a little bit better than we think it will next year," he said.
Taiwan Semiconductor Manufac-turing Co (
As for Hong Kong, the market is trading at an average price of around 15 times forecast earnings for this year, but is trading at a discount to net asset value. It also offers an attractive dividend yield, averaging 4 percent.
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