By Michael Tsang and Chen Shiyin
Aug. 18 (Bloomberg) -- Vanguard Group Inc., Fidelity Investments and Capital Group Cos. are finding stock bargains in India, Taiwan and Japan that would make Benjamin Graham proud.
The world's three largest mutual fund managers are buying after a bear market erased $2.3 trillion from Asian stocks this year and cut the value of State Bank of India, Hon Hai Precision Industry Co. and Toyota Motor Corp. by 25 percent or more. The declines, spurred by the fastest inflation in a decade and rising borrowing costs, reduced share prices in the MSCI Asia Pacific Index to 13.9 times profit, the cheapest in at least 13 years and the lowest versus the Standard & Poor's 500 Index since 2002, according to monthly data compiled by Bloomberg.
Earnings growth, which along with low prices provides the margin of safety recommended by Graham and David Dodd in their 1934 investment manual ``Security Analysis,'' averages 5 percent among Asian companies at a time when profits in the U.S. are falling amid the worst housing slump since the Great Depression.
``We are looking to add and that includes most of the Asian markets,'' said Virginie Maisonneuve, who co-manages the $18.4 billion Vanguard International Growth Fund and is the head of global and international equities at Schroders Plc in London. ``People are going to start going back and saying, `Wait a minute. I still can find companies that are growing.' We're starting to see some very attractive valuations.''
The fund increased its holdings in Mumbai-based State Bank of India since February and bought more shares of Toyota and Tokyo-based Honda Motor Co. in the second quarter, according to Vanguard's Web site and data compiled by Bloomberg. Maisonneuve declined to comment on the fund's holdings.
Hardest Hit
Asian stocks plummeted the most since global equities climbed to a record in October, losing 27 percent. In the U.S., the S&P 500 dropped 16 percent, while the Dow Jones Stoxx 600 Index of European companies declined 25 percent in dollars. All 14 markets in the MSCI Asia Pacific Index, except Singapore, tumbled 20 percent or more this year.
The declines accelerated as the biggest increase in commodity prices in three decades fueled concern rising import costs will squeeze profit margins and force central banks to raise borrowing costs. Exports slowed in Japan, Singapore and Taiwan after the collapse of the U.S. mortgage market saddled the financial industry with more than $500 billion in losses and put the world's largest economy on the brink of a recession.
Asian financial firms, which have accounted for less than 5 percent of global credit losses, slid 25 percent this year, the biggest drop among 10 MSCI Asia Pacific industry groups. The decline reduced prices to 12.6 times average earnings, 77 percent below financial stocks in the S&P 500. The difference is the biggest on record going back to 1995.
Throwing Out the Baby
State Bank of India, the nation's largest by assets, suffered the worst first-half retreat since at least 1991, and touched a three-year low of 6.44 times earnings in July. The bank last month reported a 15 percent increase in first-quarter profit as fees from selling mutual funds and insurance in the world's second-fastest growing major economy almost tripled.
``There's been some throwing out of the baby with the bath water,'' said David Darst, the New York-based chief investment strategist at Morgan Stanley's wealth management unit, which has $734 billion in client assets. ``A lot of them out there have managed to avoid, through management prudence or geographical distance, some of the worst of what's happened.''
The Vanguard International Growth Fund increased its holdings in so-called covered warrants of State Bank of India expiring in January 2009 to 2.43 million at the end of the second quarter, from about 2 million at the end of February, according to the company's Web site.
Value Traps
Capital Group's $8.76 billion American Fund Insurance International fund purchased 75,480 global depositary receipts in State Bank of India in the second quarter, according to data compiled by Bloomberg.
Gordon Tan at JPMorgan Private Bank isn't convinced Asian stocks are a buy even at historically low prices. He says investors risk falling into so-called value traps, especially in markets like Japan, where the economy shrank at a 2.4 percent annual rate last quarter and more than 60 percent of the 4,004 listed companies have market values that are less than their net assets, data compiled by Bloomberg showed.
``While valuations in Japan are looking pretty reasonable, there's no growth catalyst,'' said Tan, Singapore-based global investment specialist who helps oversee $400 billion. ``With the economy still sliding, it's not a market we want to focus on.''
Investor Exodus
Overseas investors led the exodus. In six of eight markets in Asia that disclose the data, foreigners sold more shares than they purchased this year. They're set to withdraw funds from India, Taiwan and Japan for the first time this decade, according to data compiled by Bloomberg. Collectively, overseas investors have pulled out $69.4 billion, the most on record.
Some fund managers are still finding bargains among Asian technology shares, which were battered as the U.S. slowdown raised concern demand for consumer electronics will decrease.
The $2.24 billion Fidelity Advisor Diversified Stock Fund increased its shareholdings of Hon Hai, which makes iPhones and iPods for Apple Inc., by 17 percent to 3.5 million shares as of the end of June. The Taipei-based company lost as much as a third of its market value this year, driving its price-earnings ratio to 10.97 last month, the lowest since at least 1997.
Its PEG ratio, which compares the stock's price-earnings ratio with projected profit growth, fell to 0.4 last month based on estimated earnings, a third the average of S&P 500 technology companies. The lower the number, the cheaper the stock.
`Dominant Companies'
``There are a number of dominant companies that will come out of this just fine,'' said Dan Chamby, 48, who runs the $53 billion BlackRock Global Allocation Fund in Plainsboro, New Jersey. He declined to identify individual Taiwan companies because his fund is currently buying some of their shares.
Automakers are also attracting investors after some of the steepest share declines in over a decade. Capital Group's $59.7 billion American New Perspective Fund bought 2.8 million shares of Toyota in the second quarter, boosting its holding by 42 percent to 9.49 million shares, data compiled by Bloomberg show.
Toyota, the world's biggest automaker by value, had its biggest first-half retreat since 1995. That helped pushed prices to 8.25 times the Toyota City, Japan-based company's earnings, the cheapest since at least 1999, data compiled by Bloomberg showed. Honda, which Maisonneuve's fund bought, after declining as much as 30 percent this year, traded at a price-earnings ratio of 6.88 in March, the lowest in at least a decade.
``If you love the stock and it's down 50 percent, put a little bit in,'' she said. ``If it goes down further add a little bit more.''
To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Chen Shiyin in Singapore at schen37@bloomberg.net.
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