Asian factor brings a boost to the Pru

Oct 28 2009 by Andrew Miller , The Journal

ALTHOUGH equity markets have been in good form for much of the year, economic data releases have continued to give investors cause for concern – most notably last Friday’s announcement that the UK economy continued to contract in the calendar third quarter.

Many investors had hoped that the period might see something of an improvement in the UK’s economic fortunes, but it’s now clear that it will be a long, hard slog to return the UK economy to normality, particularly as next year is likely to see rising taxes and higher unemployment levels.

It’s perhaps not surprising then that talk of an extension of the Bank of England’s £175 billion “quantitative easing” programme has been rife in recent days.

At the start of the year we felt that the major emerging economies – Brazil, India and China – would perform better than the so-called “developed” economies.

In large part, this reflected our belief that countries without heavily indebted consumers and bursting property market “bubbles” would see a fairly quick return to growth in late 2009 or early 2010, while worries about consumer (and more recently government) indebtedness would act as a drag in the “developed” world economies such as the US and UK.

We also felt that Asian and emerging equity markets offered good valuations at the start of the year, and indeed they have performed spectacularly since March’s lows.

Given the clear disparity in economic performance between Asia and that of the developed world, we still think that it is worthwhile having exposure to Asia’s superior rates of economic growth in investment portfolios.

However, it is impossible to ignore the fact that Asian stock markets can no longer be viewed as being cheap following their stellar performance.

It is for this reason that we believe that it could make sense to consider developed world companies that have a significant presence in Asia – as valuations are often more attractive than those for the local Asian stocks, while foreign exchange and corporate governance risks are lower.

One of the best candidates in our view is Prudential, which benefits from a unique Asian franchise. We expect this business to deliver much stronger growth than that produced by Pru’s UK-focused peers.

We are also encouraged that the Pru released a very strong set of interim results on August 13. These results beat the City’s expectations and the dividend was also increased, reaffirming our confidence in the group.

Having outperformed over the year to date, shares in the Pru are trading at the upper end of the range within the sector.

Although this may look slightly off-putting at first, we think such a valuation is justified by the Pru’s superior growth outlook, which in turn is driven by its Asian division.

The group’s growth rates in the UK are likely to be lower than those in Asia, but these businesses retain the ability to generate significant amounts of cash.

The Pru’s solvency position is also robust and has been aided by the disposal of its Taiwan agency business. For those who want exposure to the long-term Asian “growth” theme and any further equity market rally, there are few better names in the UK market currently in our opinion.

Andrew Miller is regional office head of Barclays Wealth