How best to invest in the Asian market

By Deputy Editor Tim Bennett Oct 02, 2009

Tim Bennett

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HSBC's chief executive is heading East. "Asia is our biggest business and China our number one priority. To drive the business you have to be here," said Michael Geoghegan last week, on his move from London to Hong Kong.

But for investors who want to grab a slice of Asian equity growth, which of the two classic investing strategies works best? Value (buying 'cheap' stocks) or momentum (chasing popular stocks higher)?

Lessons from 2009

Asian stockmarkets fell off a cliff in 2008, bottomed in March this year, and have since leaped by around 50%. That volatility has led some investors on a wild-goose chase, says Citigroup's Markus Rösgen. "We all want to own the best-performing market or sector every month", but "few achieve it". The good news is, there's no need to chase the latest growth story – "since the lows, it's been all about value".

Value investors, who follow an approach pioneered by Ben Graham (see below), believe that you make money from shares in the long run by ignoring the herd and looking for cheap, robust stocks. This works, notes Rösgen, because "good fundamentals and the market's discovery of these gives 'good' momentum, not the other way round". In other words, when stocks are good value, the market eventually notices and drives them higher.

This didn't work when the market was in freefall. That's because when investors are panic-selling, it's nigh on impossible to pick the lows, because prices just keep falling – even when, using value ratios, they start to look like bargains. But since the bottom, these "value actors have been in the driving seat". Value strategies have also been the top performers over the past one and two years. So what are the most reliable value ratios?

The best ratios

Over the past year, ignoring the impact of country and sector, Citigroup says that picking shares using value ratios such as price-to-book (the share price divided by balance sheet net assets per share), the dividend yield, and the price-to-sales (p/s) ratio (the share price divided by a year's turnover) beat anything else. And over the past two years, the top three were p/s, price-to-book (p/b) and the trailing price-to-earnings ratio (the share price divided by the latest 12-month earnings figure). So while "our gut instinct may say buy growth when in Asia, listening to your head may yield better results".

So what should you buy?

As we near the end of the current cycle "momentum will once again become king of the castle", notes Rosgen. But "that is still a long way off". The most profitable game in town for now remains "value, value and more value". So which Asian stocks should value investors buy?

Citigroup has a list of the cheapest 50 large caps screened for a low p/e, low p/s, and low p/b. The good news is that the best ones are all well-diversified blue chips that should be safe bets even in such tough times. Agricultural, industrial and energy products firm Noble Group (Singapore: NOBG) has the lowest p/s ratio at 0.18.

The four Asian stocks with the lowest p/es are listed in Korea – an expensive market to access from the UK. In fifth place is Hong Kong-listed oil, gas and chemicals giant Sinopec (HK: 0386) – on a p/e of 9. In the top quartile on a p/b basis is container ports-to-telecoms giant Hutchison Whampoa (HK: 0013) – p/b 0.86.

One stock that makes the top two quintiles on all three counts is Jardine Strategic (Singapore: JSH) – p/s 0.58, p/e 10.7 and p/b 1.0. Its interests span commercial property, hotels and transport.

Don't gamble, invest

Ben Graham's Intelligent Investor turns 60 this year. It's a book that will "repay its purchaser a hundred times", says The Motley Fool. Although value investing is now well established, when it was published in 1949 it held "revolutionary insights into evaluating companies". Since then, "all fundamental investing writing has followed Graham".

Graham was the first to emphasise the importance of balance-sheet strength combined with relative cheapness. He largely dismissed growth investing; he understood it, and outlined its attractions, "but could not see it working".

His value-investing approach favoured a handful of ratios including a low p/e backed up with a healthy dividend yield and a p/b ratio, ideally below one. He also cautioned against being distracted by the whims of 'Mr Market', prone to lurching from optimism to pessimism. The best protection, suggested Graham, was to diversify between equities and bonds.

All in all, says The Fool, the book will teach you "the difference between investing and speculation, the stockmarket and the racetrack, and value versus price".

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