Are prospects bright for Asian equities?
Our positive view on Asia ex Japan equity markets has been challenged recently as Chinese equities – which make up close to 40% of the regional index – have lagged their global peers by close to 10% since March. Yet, despite the poor performance and persisting US-China trade tensions, we see reasons to remain constructive on the region.
First, from a tactical perspective, we believe that lot of bad news is already priced in Asian equity valuations, leaving room for a short-term rebound. Indeed, earnings estimates for 2019 and 2020 are 12% and 10.5% lower than they were six months ago.
Money flows indicate that investors have reduced exposure to broad emerging markets (EM) for more than 12 consecutive weeks, led by $4bn of outflows from China this year. As such, we believe that it would not take much (eg a stabilisation in macroeconomic data or positive news on the trade front) for the sentiment to turn supportive for equity markets again.
Attractive growth profile
Second, structurally the region offers one of the most attractive growth profiles on the planet. Demographics help, 85% of the world’s population living in a developing country like China or India.
This growth profile is shifting from a very cyclical, investment-led development to one that is much more reliant on consumption. This offers new, bigger and more resilient avenues for growth which will profit not only local players but also global companies that cater for an expanding middle and upper-class.
Accessing emerging markets
Unfortunately accessing the huge profit pool available in emerging markets has always been a challenge for investors. Such markets may not offer the transparency, liquidity or underlying exposure desired. For that reason, many prefer to access “EM via DM” (developed markets). This has been a particularly successful strategy this year. The shares of some European luxury companies - which derive close to half of their sales from EM – have appreciated by more than 50% in the last six months.
With valuations of EM-exposed companies reaching elevated levels in the developed world, we believe that direct emerging market exposure is appropriate. But because emerging markets, such as Asia ex Japan, remain heavily tilted towards manufacturing and old industries, adopting an active approach is, in our opinion, a more relevant strategy.
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