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Asian stocks seen as bargain

- Alan Lavine and Gail Liberman

Think Asia instead of the United States.

Robert Conlon, manager of the Investec Asia Focus Fund, says that U.S. stocks still are too expensive based on future corporate earnings. But Asian stocks are a bargain. His fund is up 11 percent this year ending in July. By contrast, the average U.S. stock fund is down about -20 percent.

"The U.S. stock market is in a post-bubble environment," he says. "For a prolonged period, economic growth is likely to be below historic average rates. The stock market still is pricing in strong growth in corporate profits and therefore is at best likely to give poor returns."

By contrast, the analyst says the Asian economies are likely to grow more rapidly, led by the consumer. Profit growth should be very healthy, yet the stock markets are trading at less than half the levels of the United States'. "We believe Asia is likely to continue to outperform the U.S., and that the U.S. (stock market) will not return to the performance of the late 1990s," he says.

Reasons he likes Asia:

  • He owns stocks that only sell at 10.5 times their earnings. In the United States, you have to pay 24 times earnings for stocks. * The dividend yield in Asia is 3 percent--twice the level of stock dividend yields in the United States.

  • Asian stock markets appear to be priced at a maximum of 50 percent of the level of the U.S. stock market.

    Consumer debt is a major U.S. problem. That will hurt an economy which is highly dependent on consumer spending.

    In sharp contrast to the U.S. consumer, the Asians have a high savings rate of over 30 percent. Conlon says that throughout the 1980s and 1990s, this high savings rate was used to finance heavy levels of corporate investment.

    However since 1998, investment levels have slowed as Asia's corporations have focused on generating higher returns on the invested capital. This has sharply increased Asia's profitability and has left the region with an excess of savings.

    Interest rates have therefore fallen and the Asian consumer has shown signs of reducing savings and spending more. So economic growth in Asia looks better than growth in the United States.

    "We believe Asian economic growth in the coming years will be domestically driven with consumption growing at a faster rate," he says. "When compared with the exhausted and heavily indebted U.S. consumer, the Asian consumer offers significant potential."

    Conlon's fund does not invest in Japan. Largest country holdings include South Korea, Taiwan, Hong Kong, Malaysia and Singapore. Samsung Electronics is the fund's largest holding. Other stocks include Taiwan Semiconductor, Cathay Pacific Airways, Resorts World and Hyundai Motor.


    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

    To read more columns, please visit the column archive.

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