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China’s slowdown has driven a region-wide decline in exports and Asian underperformance compared with global markets, according to the latest Russell Asia Market Commentary.

The report notes that Asia ex-Japan has underperformed in Russell’s Global Developed index over the last 12 months. “Concerns on China’s slowdown and the impact of the economic downturn on Asia’s export-exposed economies have overshadowed the strong policy moves in Europe and the QE3,” said Andrew Pease, Russell Investments’ Global Head of Investment Strategy and author of the report.

“This year’s Asian underperformance in part reflects the current risk-off rally. We may be near the peak of the current risk-on cycle and the US fiscal cliff could cause another risk-off episode,” said Pease.

However, Russell finds that the Asian markets’ underperformance provides an opportunity to invest in the region.

“Our Composite Value Indicator (CVI) suggests that the region was approximately 10 per cent undervalued. Among the countries, China, India and South Korea are the most undervalued in Asia ex-Japan,” said Pease.

Pease added: “Although the outlook for growth in 2013 and beyond will remain uncertain, the Chinese economy should soon stabilize and outperform.”

According to the report, Thailand and Malaysia are the region’s most expensive markets. Thailand is one of two Asian markets that are expected to grow faster in 2012 and greater than its 10-year average.

The Russell report also finds the financials, energy and industrial sectors are most attractive, trading at a P/E ratio discount. However, consumer staples, telecomm services, and IT are trading at a P/E ratio premium.

“We remain optimistically cautious on Asian markets, as they are highly dependent on global macroeconomic factors. Asian markets have registered double-digit gains so far this year due to the impact on the ECB’s bond- buying program and the QE3. However Asian, particularly Chinese, exports fell as their major trade partners in Europe are facing tough conditions.” said Pease. “However, we do think most Asian markets have some valuation upside and should outperform the United States in a moderately positive share market environment.”

Other key points from the report include:

• Share market valuation remains reasonable, in absolute terms. Russell’s Composite Value Index (CVI) suggests that the region was around 10 per cent undervalued as of the end of September.
• Thailand and Indonesia are the only countries expected to record stronger growth in 2012 than their 10-year average.
• Over the past 12 months, all currencies except the Hong Kong dollar and Chinese renminbi have weakened against the USD.
• The Indian rupee and Indonesian rupiah represent the weakest in the region, which are down by 17.2 per cent and 10.3 per cent respectively.
• Russell expects that GDP growth in the US will be 2 per cent in 2013.