With vigorous growth in the region, getting into China, India, and other countries should position companies well for the expected groundswell of shareholder value. And for many sectors, such as high technology and manufacturing, the advantages of going to Asia, particularly China, have so changed the competitive dynamics that there's little choice but to join the rush. Many executives who invest in China or India believe that these markets will suddenly kick-start stalled growth at home, reviving their companies' sagging prospects. On that score, we think caution is in order, for two reasons.
First, from a growth perspective, the returns from investments in Asia just aren't going to be that large – at least over the next decade. Even under optimistic 10-year forecasts for these fast-growth markets, in most industries the real value for shareholders will still lie in the United States and Europe.
At current growth rates, corporate investment in Asia will not have a tremendous impact on the short or medium-term growth and profitability of multinationals. One Western conglomerate, for example, recently announced its goal to double its revenues from China over the next five years – a 15% annualized rate of growth. That figure may sound weighty, but since China currently represents only 5% of the company's revenues, the impact would increase the conglomerate's overall growth rate by a mere 0.6 percent.
Second, one useful way of looking at Asia is from a capital markets perspective. Corporations can learn what to expect upon entering the Asian market by analyzing the region's listed companies in terms of their valuation and underlying performance. From this angle, the Asian market contains complications that any company would be wise to consider. While some companies have demonstrated high growth and profit margins, for example, Asian companies trade at a consistent discount compared with their US and European counterparts?the sole exception being Chinese stocks on the Shanghai and Shenzhen exchanges, many of which are also tracked by the IBES index. Investors could well be skeptical of these companies, since their high valuations reflect not only their underlying strength but also the immaturity of the markets and a lack of investment alternatives in China. For some companies tracked by the IBES and also traded in Hong Kong, where investors enjoy more investment options, the Hong Kong price can be a half to a third lower than the price in mainland China.