The valuation gap between Asia and Western equity markets is not at the extremes seen six to nine months ago, and while Asia’s economies are still correlated to some extent with those elsewhere, they are less vulnerable to shocks, says Matthews Asia.

The valuation gap between Asia and Western equity markets is not at the extremes seen six to nine months ago, and while Asia’s economies are still correlated to some extent with those elsewhere, they are less vulnerable to shocks, a fund management house says.

Fewer Asian nations, for example, have fixed exchange rates, pegs and other rigidities than was the case at the time of the 1997-98 Asian Financial Crisis, giving these countries more room for manoeuvre, Robert Horrocks, chief investment officer, Matthews Asia, told journalists yesterday.

A specialist, as its names suggests, in Asia, Matthews Asia is a US-headquartered firm overseeing around $28 billion of client funds.

Improving conditions for Asian equity markets, which in most degrees lagged far behind mainstream developed markets last year, has seen the relative valuations of both come in. According to a chart shown by Horrocks, the average price/earnings ratio for Asia ex Japan is around 13 times earnings (data as of 17 September). The S&P 500 Index has a ratio of more than 19.6 times. There is also, Horrocks said, some tentative sign that earnings margins for Asian corporates might be hitting a trough, presaging a recovery. The average EBIT margin for Asian firms for 2001 to 2008 is 9.84 per cent; in 2009 to 2014, it has fallen to 7.6 per cent.

Horrocks said there are a number of positive forces that should drive the economies of Asia, not least the reform-orientated governments of India, China and Japan, which have had new administrations in the past 12 months. These governments were focused heavily on supply-side economic reforms, such as measures to improve competitiveness, while in the West, much of the action has been around boosting demand. “The West has been trying to get the filling back into the pie; Asia has been trying to make a bigger pie, a bigger crust,” he said.

On a separate issue, Horrocks’s presentation touched on the sensitive issue of China’s so-called shadow banking system, referring to the network of non-bank financial institutions offering savers higher returns than from traditional banks, raising worries about a build-up of risk. According to various data sources, shadow banking as a percentage of broad money liabilities is around 20 per cent in China, around 50 per cent in the eurozone and 80 per cent in the US. (In the latter country, non-banks have accounted for a larger share of funding for business and persons than has been the case for some time in Europe.)