Saturday, November 5, 2011

Proceed with care in Asian investments

Q: Asian markets are at extremely cheap levels now. Do you think it is a good time for investors to enter this market? 

A: Using the MSCI Asia ex-Japan Index as a gauge, Asian markets are indeed at very attractive valuations. From a price-to-earnings perspective, the market is currently at its lows compared to the last 35 years. Further, from the angle of price-to-book ratio, Asia is also well below its long-term average of 1.8x at current levels.

Despite the cheap valuation, it may be too soon to jump back into a high beta market like Asia: the global headwinds stemming from the crisis in Europe, as well as the slowdown in the US and China, have shown few signs of easing.

However, it is also advisable for investors to maintain a balanced and diversified portfolio during these volatile times. Although risk aversion remains intact, investors interested in gaining exposure to the Asian equity market can consider the defensive sectors. These sectors may help manage downside risk of a portfolio.

Additionally, defensive companies are less sensitive to economic cycles as they produce items that are needed by consumers irrespective of economic circumstances. Another enticing aspect will be that of sustainable dividends which may help ease downward pressure from the market by adding a premium over steady income.

Investors can also consider dollar cost averaging (DCA) to gain exposure to Asian markets. This is a disciplined and convenient approach where investors reduce the need to time the market. In addition, it may help reduce investment costs and boost potential returns when the market turns for the better.

The foundation of successful investing remains educating and familiarising oneself with the various aspects of the market. Investors should also conduct due diligence to back each investment decision. It is also advisable to speak to a qualified financial adviser to truly understand the risk before investing in the market.

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