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North Asian cyclical stocks 'unjustifiably cheap'
Monday, 29 July 2013 11:55am

Cyclical companies based in North Asian economies represent the best value investment in Asia, according to AllianceBernstein's specialist in the region Stuart Rae.

The portfolio manager, who is chief investment officer for Pacific Basin Value Equities, said that the demand for yield and the perceived strength of the ASEAN countries had seen investors bid up the prices of Southeast Asian companies with defensive characteristics over recent years.

For investors with a contrarian approach, Asia's susceptibility to herding behavior creates value opportunities. He added that currently the best price-to-earnings ratios were available in companies that are more exposed to the economic cycle.

"Stocks with the highest return-on-equity are at the highest premium while high beta stocks are at an all-time low. The disparity between the two has never been greater," he said.

While the fund manager is cautious on resources and materials companies in light of a shift towards consumer-led growth in Asia, he is positive about the real estate, technology and consumer cyclical sectors.

"These stocks are about 30% cheaper than the defensives. I can't say exactly when the tide will turn, they may even get cheaper, but it looks a compelling opportunity," Rae said.

Likewise, Rae explained that different geographies were showing huge disparities in valuation between them. The ASEAN nations, for instance, are trading at a premium of 1.5 times while the Philippines -- the most expensive region - is trading at double the average.

"Cyclicals and North Asia are unjustifiably cheap against the Asian, and their own historical average," he said.

Elsewhere in the region, Rae said that despite growing fears to the contrary he was 'comfortable' with China's growth prospects, but admitted he had no more than benchmark exposure to the region at present.

"I don't pay too much attention to the broad numbers coming out of China because they are easy to manipulate," he explained. "Instead we build up a larger picture from all the other data we collect. Measures of economic activity such as power, cement and steel consumption, as well as auto production point to a tightening, but by no means a collapse."

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