Small firms given new life as Asia opens up
ASIAN economies are coming of age, making the shares of small and mid-size companies - at least in some markets - increasingly attractive, says fund manager Alfred Ho.
Invesco Asia's associate director said deregulation, with its dismantling of monopolies, and privatisation were creating opportunities for new and small companies, especially in Hong Kong and Malaysia.
'The medium to small-cap effect, in our opinion, really depends on the maturity of the underlying economies,' said Mr Ho, who manages Invesco's newly rechristened Asia Enterprise Fund, which was formerly known as the Asia Fund.
'These structural changes are long-term changes that are going to change the whole structure of Asian markets.' Gone were the days when many of Hong Kong's small and mid-size companies were original-equipment manufacturers, providing low-value-added services. Now, he said, those companies were getting much better franchises.
Red chips - 'the typical medium-cap companies' - were leading the way, he said, making the best of asset injections from mainland parents.
Although the recent spree of injections might not continue, it did not need to because many of the mainland-related businesses in Hong Kong were becoming quite successful in their own right.
'I'm not banking on the hope that next year there's going to be a lot more asset injections,' he said.
'But for these companies so far, for those with good track records, they have been consistently getting good projects, they have been managing those contracts well, and they have been producing very good returns for investors.' The outlook was so promising, Mr Ho said, Hong Kong's stock market would experience a handover-related re-rating. Over the past five years, the market had traded at price-earnings multiples in the range of eight to 12, which he described as low by regional standards. But this had already jumped to about 13.5, and could go a bit higher yet.
'It has broken the historical range already because, coming into '97, people are not talking about political discount, they are talking about premium,' he said. 'When the uncertainty becomes a fact and they are not seeing any major dramatic changes, then the discount shouldn't be there.' Malaysian small and mid-size companies were also enjoying a renaissance, he said, buoyed by the Government's privatisation drive, which is creating new business opportunities, and its Bumiputra-first policies, which benefit indigenous Malays. The country's small and mid-size enterprises are often owned by Bumiputras.
'In Malaysia, over the past few years, it's been nothing but small to medium companies,' he said. 'The Malaysian Government is one of the pioneers, in the Asian context, of privatising government operations, so the medium-cap companies are getting a lot of the goodies.' This transformation was particularly apparent in sectors supplying infrastructure, such as toll roads, power plants and port facilities, he said.
Meanwhile, in the telecommunications sector, deregulation was putting the region's traditionally monopolistic operators under heavy profitability pressures. But, even as the operators were suffering, the equipment makers were doing very well, he said.
'It's a market where you can do a lot of stock selection,' Mr Ho said. 'The Malaysian economy's one of the economies in the Asian context where people are really upgrading. You can see they're upgrading their standard of living very dramatically. They're buying a car, buying a property, because the economy has been growing at about 8 per cent for the past five years.'
