2016 Global Market Outlook Press Briefing ASIA EX JAPAN: NEITHER BOOM NOR DOOM Anh Lu Portfolio Manager (Asia ex Japan Equity Strategy)
The Good news, the Bad News, Our Outlook The Good News Not a crisis in the making Valuations are supportive Improving earnings outlook Reforms are happening, albeit slowly Asia benefits from falling commodity prices The Bad News Debt levels are high, especially in China Poor export demand Return on equity needs to improve Confidence levels are low Uncertainty around Fed policy Outlook Plenty of good bottom up opportunities at reasonable valuations 2
Unlikely to Repeat 1997 Debt levels have risen sharply, but debt is largely domestically owned and in local currency Inflation is low Most of the region runs current account surpluses compared to deficits in 1996/97 Foreign Exchange (FX) is no longer pegged, acting as a release valve, and FX reserve cover is generally high Sources: T. Rowe Price and Morgan Stanley. 30 th September 2015. 3
External Debt/GDP Lower Than During Asian Financial Crisis As at 31 December 2014 EXTERNAL DEBT AS % OF GDP 45 AXJ ex-hong Kong, Singapore and Taiwan AXJ ex-hong Kong and Singapore 40 35 30 25 20 15 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *AXJ: Asia ex Japan Sources: Morgan Stanley, CEIC, and Haver Analytics. Generally lower external debt, and where it exists it is mostly local currency. Malaysia, Indonesia and Thailand are still the most at risk on this metric. 4
Current Account as a % GDP External Vulnerability of EM Asia Has Improved Since 2013 As at 30 June 2015 EXTERNAL VULNERABILITY OF EMERGING MARKET ASIA HAS IMPROVED SINCE 2013 14.000 12.000 10.000 Q2 2013 Q2 2015 8.000 6.000 4.000 2.000 0.000-2.000-4.000-6.000 Taiwan Malaysia Korea Philippines Thailand China India Indonesia Source: Haver Analytics. Asia is broadly well placed with a net current account surplus. Most-at-risk current account deficit economies have seen their deficits reduce since the 2013 taper tantrum. 5
Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Price to Book Ratio (x) Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Price to Earnings ratio (x) Valuations Are Attractive As at 31 October 2015 19 17 15 13 11 9 7 MSCI AC Asia ex JP MSCI The World Index 3 2.5 MSCI AC Asia ex JP MSCI The World Index 2 1.5 1 Source: FactSet. 6
EBITDA Margin Earnings Delivery is Key to a Rerating As at 31 October 2015 100% 80% 60% 40% 20% 0% -20% EPS Change Trailing PE Change Total Return 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -40% S&P 500 MSCI Japan MSCI Europe MSCI AC Asia ex Japan *EPS (Earning Per Share), *EBITDA (Earnings Before Interest Tax Deprecation & Amortization). Source: FactSet. Asia has disappointed on earnings relative to developed markets over the past three years. Earnings are now on a rising trend, supported by margin recovery and greater capital expenditure discipline. 7
GDP Growth (%) Reform Is Key to Boosting Growth in the Region As at 30 September 2015 ASIA EX JAPAN GDP GROWTH (%) 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E Reforms in key areas such as infrastructure, labour laws, taxation and fiscal policy are needed to boost regional growth back to an upward trend. Source: FactSet. 8
% of Index % of GDP Asia ex-japan Outlook As at 31 October 2015 A BENEFICIARY OF LOWER RESOURCE PRICES RESOURCE STOCKS AS A PERCENTAGE OF MARKET CAPITALIZATION ASIA S TRADE BALANCE TO IMPROVE ON LOW OIL 30% Energy Materials Resources 3 2 2.4 25% 1 20% 0-0.1 15% -1 10% -2-1.9-1.7-3 5% -4-3.8-3.6 0% Asia ex Japan EM Latin America EM EMEA -5 Japan Asia ex Japan Europe USA EM Latin America EM EMEA Sources: FactSet and International Monetary Fund (IMF). 9
Debt Levels are High As at 30 June 2015 CHINA DEBT TO GDP BREAKDOWN Central government Local governments Mid/large corporates Small business Consumers 300% 250% 200% 150% 12% 16% 43% 19% 19% 57% 59% 20% 58% 22% 57% 24% 58% 26% 58% 34% 100% 77% 83% 83% 82% 98% 106% 111% 119% 50% 0% 15% 23% 23% 22% 22% 23% 26% 27% 21% 22% 21% 19% 18% 19% 19% 20% 2008 2009 2010 2011 2012 2013 2014 Jun-15 Source: Morgan Stanley. 10
Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Poor Export Demand As at 30 September 2015 Export Volume, Year on Year% (3 month moving average) 15% China, Korea, and Taiwan 10% 5% 0% -5% Sources: CEIC and Morgan Stanley. 11
Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Return on Equty (%) ROEs Need to Improve As at 31 October 2015 18 MSCI AC Asia ex JP 16 MSCI The World Index 14 12 11.5% 11.3% 10 8 6 Source: FactSet. 12
Opportunities China India/SE Asia Developed Asia Technology/Innovation Technology/Innovation Technology/Innovation Consumption/Services Consumption Global Multi-National Corporations (MNCs) Reform beneficiaries Capital Expenditure/Investment recovery Pan-regional operators 13
IMPORTANT INFORMATION This material has been prepared for informational purposes only. The views contained herein are those of the presenter(s) as of the date of the presentation and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. Information and opinions, including forecasts and forward-looking statements, are derived from proprietary and nonproprietary sources deemed to be reliable; the accuracy of those sources is not guaranteed, and actual results may differ materially from expectations. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Under no circumstances should this material, in whole or in part, be copied, redistributed, or shown to any person without prior consent from T. Rowe Price. This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities. This material does not constitute investment advice and should not be relied upon as such. Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. Past performance cannot guarantee future results. All investments involve risk. The charts and tables are shown for illustrative purposes only. T. Rowe Price Investment Services, Inc. 2015-US-15881 14
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