Are prospects bright for Asian equities?

18 July 2019

4 minute read

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.

Short-term rebound

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.

Related articles

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

This document has been issued by the Investments division at Barclays Private Banking and Overseas Services (“PBOS”) division and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. All opinions and estimates included in this document constitute our judgment as of the date of the document and may be subject to change without notice. No representation is made as to the accuracy of the assumptions made within, or completeness of, any modeling, scenario analysis or back-testing.

Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services, and we do not guarantee the information’s accuracy which may be incomplete or condensed.

This document has been prepared for information purposes only and does not constitute a prospectus, an offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it.

Any offer or entry into any transaction requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding transaction documents. Any past or simulated past performance including back-testing, modeling or scenario analysis contained herein does not predict and is no indication as to future performance. The value of any investment may also fluctuate as a result of market changes.

Neither Barclays, its affiliates nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation..

This document and the information contained herein may only be distributed and published in jurisdictions in which such distribution and publication is permitted.  You may not distribute this document, in whole or part, without our prior, express written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions.

The contents herein do not constitute investment, legal, tax, accounting or other advice. You should consider your own financial situation, objectives and needs, and conduct your own independent investigation and assessment of the contents of this document, including obtaining investment, legal, tax, accounting and such other advice as you consider necessary or appropriate, before making any investment or other decision.