Asian Equities: Turnaround Drivers

 In Market and Investment Insights

Andrew Gillan, Head of Asia ex Japan Equities, discusses reasons behind the recent rally in Asia ex Japan equity markets and opportunities the region may hold for the long-term investor.

Key Takeaways

  • Asia ex Japan equity markets have gained approximately 10% year to date on the back of moderating U.S. rate hike expectations and a potential U.S./China trade tariff deal.
  • While fundamentals have not improved, the region has benefited from positive asset flows and a recovery in the China A-shares market.
  • Given the strong start to the year, it is reasonable to expect volatility in the months ahead. However, a correction could offer the long-term investor an opportunity to gain exposure to this fast-growing region.

What a difference a few months make! Asia ex Japan equities have risen approximately 10% in U.S. dollar terms in the first 10 weeks of 20191 in stark contrast to the sharp sell-off in the fourth quarter and general market weakness last year as a whole.

So what has changed? Expectations about the pace of U.S. interest rate rises have shifted considerably, with the market now expecting a much more measured increase – if indeed there are any further hikes in rates. This means that the U.S. dollar strength we saw in 2018 is unlikely to repeat itself and puts emerging market assets back in focus. The second, more Asia-specific shift has been a softening in the U.S. stance toward the implementation of trade tariffs against China. Although no resolution has been reached, a deal of some kind seems much more likely given the impact that tariffs have already had on global growth and investment.

The China Effect

Rather surprisingly, fundamentals within the region are little changed and, if anything, both macroeconomic data and corporate earnings have weakened in early 2019. But the region has benefited from positive asset flows and a recovery in the mainland China A-shares market, which has even ventured into bull market territory following last year’s bear market.

The Chinese economy continues to slow, and guidance at the recent National People’s Congress targeted a still-healthy band of 6%-6.5% gross domestic product (GDP) growth, down from last year’s 6.5%. Clearly, the Chinese government’s deleveraging campaign has impacted economic output, and as a result, we have started to see a reversal in policies to support growth. These actions, however, have remained targeted and seemingly more disciplined than in the past, which implies that the government wants to reduce the reliance on debt-fueled growth.

Long-Term Opportunity

Given the strong start to the year, it is very reasonable to expect more volatility ahead stemming from events external to the region as well as within, including the China/U.S. trade talks and a number of domestic elections. While we remain positive on the outlook for the region, given the relative valuation of Asia against developed markets, we do not expect the recent market strength to continue in the short term without support from corporate earnings or stronger economic data. Any correction could offer the long-term investor a good opportunity to gain exposure to one of the world’s fastest-growing regions.

1Source: Bloomberg, in USD, as of 3/8/19

Foreign securities are subject to currency fluctuations, political and economic uncertainty, increased volatility and lower liquidity, all of which are magnified in emerging markets. Fixed income securities are subject to interest rate, inflation, credit and default risk. As interest rates rise, bond prices usually fall, and vice versa.

C-0319-22737 03-30-20

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