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The Asia Pacific Fund, Inc. | A Diversified, Closed

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Baring Asset Management (Asia) Limited
19th Floor, Edinburgh Tower
15 Queen’s Road Central, Hong Kong
Tel: (852) 2841 1411
Fax: (852) 2868 5296
Internet: www.baring-asset.com
THE ASIA PACIFIC FUND, INC.
Virtual Forum
2006 : Outlook for
Asia Pacific Markets
Khiem Do – Head of Asian Equities
April 2006
BAM’s 2006 Key Global Forecasts
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G7 economies expected to grow at long-term trend rates, with first
half stronger than second half
G7 core inflation likely to remain below 2%
US Federal Reserve likely to pause when rates reach 5% by June ’06,
and ECB / BoJ to tighten gradually
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USD likely to reach a peak in H1 ’06
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Oil prices likely to range trade between $US 55-70 /bbl
Still a relatively benign global backdrop,
but G3 monetary policy direction is key
1
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BAM’S 2006 Key Asia Pacific Forecasts
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China expected to continue to grow solidly (9 – 9.5%) and drive
the region
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Recovery of Japan is an added bonus
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Other Asian economies to grow at long-term trend rates
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Asia Pacific central banks expected to tighten slightly, but unlikely
to strictly follow the US Fed (domestic conditions matter more)
Asia Pacific currencies likely to strengthen modestly vs the USD
A favourable economic backdrop
for the region
2
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Out-performance of Asia
A Secular Re-rating Has Started
A treacherous history but
underperformance ended in 1998
MSCI Asia ex-Japan relative to MSCI World
MSCI Asia ex-Japan relative to MSCI USA
2005
2003
2001
1999
1997
1995
1993
1989
01/06
01/05
01/04
01/03
(80)
01/02
0
01/01
(60)
01/00
50
01/99
(40)
01/98
100
01/97
(20)
01/96
150
01/95
0
01/94
200
01/93
20
01/92
250
01/91
40
01/90
300
01/89
60
01/88
350
1991
Asia outperformed over the last five years
MSCI Asia ex-Japan return differential over MSCI World
MSCI Asia ex-Japan return differential over MSCI USA
Source : HSBC (3/2006)
3
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Asia’s out-performance
is set to continue
Convergence of Valuation of equity markets
30
1.8
MSCI Korea forward P/E (LHS)
MSCI AC World forward P/E (LHS)
1.6
Relative P/E (Korea/World) (RHS)
25
1.4
20
1.2
1.0
15
0.8
10
0.6
0.4
5
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
0
0.2
0.0
Source: Goldman Sachs (1/2006)
Koran P/E re-rated, global P/E de-rated
4
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5
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Far East Asia appears cheap vs
India and other Emerging Markets
Jan-06
Sep-05
8
May-05
5
Jan-05
10
Sep-04
10
May-04
15
Jan-04
20
Sep-03
PE
May-03
25
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
MSCI China
Jan-03
MSCI Korea
Sep-02
30
May-02
10
May-02
5
Jan-02
12
Jan-02
10
Sep-01
15
Sep-01
20
May-01
25
May-01
PE
Jan-01
Jan-06
Sep-05
40
Jan-01
Jan-06
Sep-05
30
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
35
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Far East Asia: Absolute PER remains low
MSCI India
22
20
18
16
14
PE
MSCI EM ex-Asia
20
18
16
14
12
PE
Source : UBS (3/2006)
Japan: Property Prices are recovering
Land prices rising after 14 years
And recovering beyond Tokyo
(index, 1985=100)
HoH, %
10
5
Office rents in Tokyo rising
Tokyo Metropolitan Wards (Highest priced lots)
6 Largest Cities (Highest priced lots)
Tokyo Metropolitan Wards (Average)
0
280
260
240
220
200
-5
180
-10
160
140
-15
120
-20
100
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Note: Six largest cities include Tokyo, Yokohama,
Nagoya, Kyoto, Osaka and Kobe; as at September
2005
Source: Japan Real Estate Institute, INDB,
compiled by Goldman Sachs Research, as at September 2005
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Note: Office rents for new buildings in the Tokyo
Metropolitan area; half-year basis, as at 1H2005.
Source: Nikkei, compiled by Goldman Sachs Research,
as at June 2005
Positive for Japanese consumers and Asian exports
6
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China : Overheating has been addressed
FAI Growth
CPI Growth
%YoY
%YoY
30
30
25
25
20
20
15
15
10
10
5
5
0
0
95
96
97
98
99
00
01
02
03
04
05
-5
94
95
96
98
99
00
01
02
03
04
05
Industrial Production
Output Growth
Loan Growth
%YoY
%YoY
25
97
18
16
14
20
12
15
10
8
10
6
4
5
2
0
0
99
00
01
02
03
04
05
95
96
97
98
99
00
01
02
03
04
05
Source: UBS (3/2006)
7
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Still in “goldilocks” phase
(strong growth, low inflation)
China : Domestic Consumption is under-estimated,
under-appreciated
GDP Breakdown by Output
Revision
15%
Agriculture
Industrial
Construction
53%
+1%
13%
+2%
46%
Service
Industry
32%
Before revision
(2004)
41%
+49%
After revision
(2004)
Source: BNP Paribas (02/2006)
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China GDP in 2004 was revised up by 16.8%
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Service industry is a bigger pie to GDP composition than initially thought
8
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China is under-going an Industrialisation phase,
just like Japan and Korea did
FAI as % of GDP - Japan
FAI as % of GDP - China
%
%
40
40
38
36
34
35
32
30
30
28
26
24
22
20
25
60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75
20
1990
FAI as % of GDP - Korea
%
1993
1996
1999
2002
2005E
45
40
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35
30
25
Both Korea and Japan had FAI as
% of GDP in the range of 30 – 40%
lasting for one to two decades в†’
China expected to grow solidly
over next 5 years
20
15
75
77
79
81
83
85
87
89
91
93
95
Source: Goldman Sachs (02/2006)
9
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China: Rural Income Growth accelerates, finally !
Urban income growth
Rural Income Growth
(% YoY)
(% YoY)
14
14
12
12
10
10
8
8
6
6
4
0
4
Per capital income - urban
2
2
0
2001
2002
2003
Per capita income - rural
2004
2001
2002
2003
2004
Source: CEIC, CLSA (12/2005)
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Thanks to supportive policies from the government
Pick up of rural income growth a further boost to domestic
consumption
Rural population в†’ 70% of China population
10
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Health of Chinese Banking system
has been improving
NPL Ratio Trend
Net Interest Margin
20%
2.9%
18%
2.8%
16%
Net interest margin
14%
2.7%
12%
2.6%
10%
8%
2.5%
6%
4%
2.4%
2%
2.3%
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Improving net interest margin
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Falling NPL ratio
Source: Lehman (02/2006)
11
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“Cleaned-up” Chinese banks:
unrecognised growth stocks?
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
Dec-04
Oct-04
20051H
Aug-04
2004
Jun-04
2003
Apr-04
2002
Feb-04
2.2%
Dec-03
0%
Momentum Factor Out-performed significantly
since mid-2005
Representative Pacific Portfolio
Market Return
VaR Factor Exposures, last 18 months
(as at 28th February 2006)
Cumulative Factor Returns, last 18 months
(as at 28th February 2006)
20%
0.60
0.50
15%
0.40
0.30
10%
0.20
5%
0.10
0.00
0%
-0.10
-0.20
Aug
2004
Nov
2004
Value
Feb
2005
Growth
May
2005
Size
Aug
2005
Momentum
Nov
2005
Feb
2006
-5%
Aug
2004
Nov
2004
Feb
2005
Value
May
2005
Growth
Aug
2005
Size
Nov
2005
Feb
2006
Momentum
Source: Baring Asset Management
Investors have been chasing strong and
sustainable earnings and price momentum
12
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Global Risk Appetite: In “high zone” currently
10
E u p h o ria
8
6
4
2
0
-2
-4
P a n ic
-6
J a n -8 1
J a n -8 4
J a n -8 7
J a n -9 0
J a n -9 3
J a n -9 6
J a n -9 9
J a n -0 2
J a n -0 5
P a n ic
Source: CSFB (27/2/2006)
Investors appear to want to continue to buy
high beta growth assets в†’ our research focus
is directed towards defensive growth
13
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Concluding Remarks
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Asia Pacific economies and markets are expected to
continue to out-perform the world in 2006
As equity risk premium is deemed to be too low, our
team continues to build a more defensive growth bias in
your portfolio
Favoured Themes include: domestic reflation plays in
Korea and China, Taiwanese technology, ASEAN
consumption and financials, and materials
Research focus on defensive growth and “un-loved”
high-yielding names, in preparation for a potentially
more challenging second half
14
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Individual Asian Markets :
Outlook & Strategy
Change of Market Leadership from Korea/Taiwan
to China from end 2005
135
FTSE Pacific ex-Japan
130
125
120
115
110
105
100
95
90
03/05
06/05
FT Korea
09/05
FT Taiwan Technology
12/05
03/06
MSCI China
Source: Factset (6/3/2006)
China’s out-performance
is expected to continue
16
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Korea and India Re-rated in 2005 on rise of ROE
MSCI Korea
MSCI India
2.1
19%
5.0
23%
1.9
17%
4.5
22%
11%
1.1
9%
PB
13%
1.3
20%
3.5
ROE
19%
3.0
18%
2.5
17%
ROE
PB
01/06
01/06
07/05
01/05
07/04
01/04
07/03
01/03
07/02
01/02
07/01
01/01
PB
07/05
14%
01/05
1.0
07/04
5%
01/04
0.5
07/03
15%
01/03
1.5
07/02
0.7
01/02
16%
7%
07/01
2.0
0.9
01/01
PB
1.5
21%
4.0
15%
ROE
Source : UBS (3/2006)
Further re-rating in Korea vs India expected
17
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ROE
1.7
Korean Market: Different this time ?
KOSPI near all-time high, but current PE is well below historical peaks
PE= 10.5x
1,600
1,400
Now
PE= 9.5x
PE= 17.2x
PE= 14.1x
1,200
PE= 18.8x
1,000
800
600
400
200
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
KOSPI Weekly
Source: UBS (3/2006)
Valuations still not stretched
18
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China Re-rating has just started
3.5
18%
17%
16%
15%
14%
13%
12%
11%
10%
9%
8%
3.0
PB
2.5
2.0
1.5
PB
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
1.0
ROE
MSCI China
ROE
Source : UBS (3/2006)
China appears grossly undervalued
19
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Asia Pacific : Relative valuation of markets
P/BV less ROE relative to Asia ex Japan currently
40%
overvalued
30%
20%
10%
0%
-10%
-20%
undervalued
-30%
India
Singapore
Australia
Malaysia
Hong Kong
Phil
Taiwan
Indonesia
China
Korea
Thailand
-40%
Source: UBS (3/2006)
Underweighting the expensive and
overweighting the cheap markets
20
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Asia Pacific : Relative valuation of sectors
P/BV relative less ROE relative currently
80%
60%
40%
20%
0%
-20%
-40%
-60%
Con non
cyclical
Tech
Industrial
Con cyclical
Financial
Utilities
Telcos
Energy
Basic
materials
-80%
Source: UBS (3/2006)
Underweighting the expensive and
overweighting the cheap sectors
21
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Hong Kong/China: Overweight
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Overweight China and underweight Hong Kong
Solid economic growth in China (9 – 9.5%) expected to
continue
HK economy and property sector being negatively
impacted by US monetary tightening п‚® mid-cycle
correction
HK market expected to perform better when US Fed
pauses
Focus on domestic reflation plays (banks, insurance,
property), materials and consumer in China
22
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Korea: Slight Overweight
пЃ®
Market still relatively cheap and should be further
rerated, but .....
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Interest rates likely to rise further
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Earnings likely to be downgraded due to strong Won
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Looking to add exposure at lower levels
23
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Taiwan: Slight Underweight
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Still no new development on the Cross-Straits link
issue
Low participation of retail investors does not bode
well for the market
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Technology still the key driver of stock market
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Market valuation is moderately cheap
24
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Singapore: Slight Overweight
пЃ®
Steady economic growth expected
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Reflationary policy endorsed
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Corporate re-structuring trend still unfolding
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Market valuation at fair levels
25
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Emerging ASEAN: Underweight
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Thailand is the preferred Emerging ASEAN
market (low valuation, poor sentiment)
Look to add to Indonesia on weakness
Specific stock opportunities in Malaysia and
Philippines, as macro environment is deemed
uninspiring
26
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India: Look to build up a larger exposure on
weakness
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Growth is strong, but rise in inflation, interest
rates and current account trends is causing
concerns, and ………
Valuations are expensive (2005 P/E = 17.6X
earnings vs Asia of 13.3X; P/B = 3.6X vs 1.9X
respectively) Source: Morgan Stanley, 3/2006
On weakness, we look to add to build a larger
exposure
27
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Important Information
This document is provided as a service to professional investors/advisers. It is issued in the United Kingdom by
Baring Asset Management Limited and/or by its investment adviser affiliates in other jurisdictions. The affiliate
serving as the Asia Pacific Fund’s investment adviser is Baring Asset Management (Asia) Limited. In the United
Kingdom this document is issued only to persons falling within a permitted category under (i) the FSA’s rules
made under section 238(5) of the Financial Services and Markets Act 2000 and (ii) the Financial Services and
Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001.
This is not an offer nor a solicitation to buy or sell any investment referred to in this document. Baring Asset
Management group companies, their affiliates and/or their directors, officers and employees may own or have
positions in any investment mentioned herein or any investment related thereto and from time to time add to
or dispose of any such investment.
The contents of this document are based upon sources of information
believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their
accuracy or completeness. This document may include forward-looking statements, which are based upon our
current opinions, expectations and projections as of the date on the cover hereof. We undertake no obligation
to update or revise any forward-looking statements.
Actual results could differ materially from those
anticipated in the forward-looking statements. Changes in rates of exchange may have an adverse effect on
the value, price or income of an investment. There are additional risks associated with investments (made
directly or through investment vehicles which invest) in emerging or developing markets. Compensation
arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available.
Private investors in the Company referred to herein should obtain their own independent financial advise before
making investments. This document must not be relied on for purposes of any investment decisions. Before
investing in the Company, we recommend that all relevant documents, such as reports and accounts and
prospectus should be read, which specify the particular risks associated with investment in the Company,
together with any specific restrictions applying and the basis of dealing. The Company may not be available for
investment in all jurisdictions. There may also be prohibitions or restrictions on distribution of this document
and other material relating to the Company and accordingly recipients of any such documents are advised to
inform themselves about and to observe any such restrictions.
Complied (Boston): March 18, 2006
28
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