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Emerging Asia - Tech tigers

Overview

  • Emerging (EM) Asia is a leveraged bet on global growth due to its highly cyclical composition
  • The ongoing pick-up in global trade is set to continue to benefit EM Asian exporters
  • Improving corporate profitability, allied to strong prospect top-line growth, suggests sustainable double digit annualised returns from the region’s stock markets from here

Broad-based growth

EM Asian equities continue to perfom well, driven by the interaction of an improving economic backdrop with rising corporate profitability. The increasingly synchronised economic vitality being enjoyed by both the global economy and the region’s economic powerhouses has spilled over into the smaller open economies like Korea, Taiwan, Malaysia and Thailand.

PBOS Investment Division believes the region should continue to benefit from the ongoing global recovery in manufacturing activity and a long-awaited IT capex cycle. Encouragingly, investment indicators are starting to strengthen alongside domestic consumption, which should add more depth and durability to this ongoing upswing.

Global trade

Regional trade, as a relatively important source of demand, has been supported by the pick-up in global economic activity. Korea, as the world’s fifth largest exporter, is one of the earliest to publish its trade data. Therefore, trends in Korean export growth provide a timely lead indicator for the direction of global trade.

The recent performance of Korean exports suggests that global trade volumes have further room to pick up – a positive sign for broader trends in regional exports. Within this, the continued pick-up in semiconductor trade should bode well for the prospects for the region’s tech exporters, as well as their respective currencies, which still benefit from a decent degree of carry.

The right type of profits and sector composition

This increasingly vibrant macroeconomic backdrop has led to a marked improvement in regional corporate profitability. Aggregate earnings per share (EPS) for the region rose by an impressive 27% from the previous year - the fastest pace in six years.1

Similarly in 2017 regional return on equity (RoE) has been trending upwards, with much of the improvement being driven by rising profit margins rather than leverage. Encouragingly, these trends largely corroborate anecdotal observations that EM Asian companies have been implementing measures to improve cost efficiency, a positive signal for the sustainability of this EPS cycle.

For those wanting to make the most out of this current growth phase, EM Asia would stand out as one of the most appropriate equity regions to be invested in. The regional index has a relatively large proportion of (non-commodity) pro-cyclical sectors levered to the global growth cycle. Technology, financials, and industrials make up more than 65% of the overall index, the largest proportion the other EM regions like EM Latin America (which is heavily exposed to unpredictable movements in commodity prices), or EM EMEA (which has a less cyclical composition).

*Source earnings per share (EPS) increase: FactSet

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