Notably, our view is that valuations in China are now particularly attractive, with Chinese public equity markets typically trading at high-single-digit P/E multiples despite the higher expected growth of many constituent companies. While there are valid concerns over the potential implications of the shadow banking system and the real estate sector, these risks appear already to be largely priced into the market, and in any case it is the public market rather than private equity that is more exposed to these risks, given the latter's relatively underweight position in the financial and real estate sectors.
Finally, in the longer-term, there is potential for additional upside through foreign exchange gains, given that the monetary and capital control policies within the region are arguably causing an artificial undervaluation of particular local currencies.
While structural drivers continue to propel outsized relative economic growth rates in much of the Asia-Pacific region, and while valuations in many of these markets appear attractive compared with developed markets worldwide, public markets have not sufficiently reflected the rate of economic development of the Asia-Pacific region. Between 1990 and 2012, the nominal GDP of the major Asia-Pacific economies expanded more than 400%, but the public markets — as represented by the MSCI Asia Pacific index — rose only 45%.
We believe investor access to certain companies within these dynamic growing sectors such as consumer discretionary, specialist industrials, information technology and health care will be important in maximizing the potential for higher returns that are better correlated to long-term growth, and that private equity offers a superior vehicle for investing in Asia-Pacific growth trends and investment themes than the public markets. Long-term empirical data support the view that private equity returns in the Asia-Pacific region as a whole significantly outperform public equities.