Emerging Asia - Tech tigers
- 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
We think EM Asian equities are set to outperform this year,, driven by the interaction of an improving economic backdrop and rising corporate profitability. Since H2 2017, the he synchronised economic pep 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.
Looking forward, we believe 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.
Regional trade, as a relatively important source of demand for the region, 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 imposition of import tariffs from the US, which is now being followed by retaliatory actions from its trading partners, has rekindled investors’ fears over trade protectionism. With the costs of such a conflict so high, and likely fairly immediate, our base outlook remains that economic self-interest would ultimately prevail, albeit with plenty of posturing from opposing parties.
Absent a further material rise in the prospects of a trade war, solid fundamentals lead us to retain a preference for the region. Aggregate valuations remain reasonable relative to developed markets, and trends in corporate profitability are still positive. The right type sector composition…
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 among other EM regions like EM Latin America (which is heavily exposed to unpredictable movements in commodity.
*Source earnings per share (EPS) increase: FactSet
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