Why are Investors Returning to Asia for Growth?

 In Market and Investment Insights

Key Takeaways

  • Investors are returning to Asia following the strong rebound in corporate earnings in 2017; this follows a number of years of structural underperformance for the asset class
  • China provides potentially some of the biggest risks for the region, but also some of the largest opportunities
  • An active approach is particularly important given better opportunities in privately owned companies compared to the state-owned enterprises that make up a large proportion of the index
  • Indian equities disappointed last year but the team believes they have strong potential for 2018

In this video update, Andrew Gillan, Head of Asia ex Japan Equities and Co-Manager of the Janus Henderson Asian Growth Strategy, provides his views on why investors are beginning to increase their allocation to Asian equities, and outlines the opportunities and challenges for the asset class. He also discusses why he believes in an active approach to investing in Asia.

What is driving an increase in Asian equities is the fact that there was structural underperformance of Asian equities and also emerging market equities for a number of years. And then in 2017, you got a really strong rebound in corporate earnings. So the expectations are for the 20% or so growth in corporate earnings for the financial year 2017. And that is expected to continue into 2018. And in that environment, Asia tends to be in fashion. Similarly, there has also been a structural underweight to Asia and to emerging markets, which has started to reverse given the improving fundamentals.

I think the key risks for Asia in 2018, both internal and external, in terms of internal, China is always going to be much in the news in terms of the strength of the economy. And there are a lot of question marks over whether the pace of reform in China is going to increase and will that have an impact on growth. So perhaps we are going to see a slowdown in growth, perhaps there is going to be an increased focus on deleveraging. My view on that is that China intends to grow itself out of the problem, so it is more looking at growth and cutting down the rate of new loans, rather than really addressing the amount of loans currently in the system. But certainly if the government is more aggressive in that reform process, that could have an impact on equity markets.

And then externally, we had a very conducive environment to Asian equities in the sense that the dollar, the U.S. dollar has been weak, Asian currencies have therefore been relatively strong. So if we were to see a reversal in that dollar weakness, then that could pose some shorter-term concerns for Asian equities. But again, we would argue that current account positions, fiscal positions in Asia are much more robust than they were a few years ago when tapering first began and these concerns were very much at the forefront.

Active management is still very relevant to Asian equities for two clear reasons, from my perspective. The first of those is that you don’t want to invest just because a company’s a large cap and you are investing in state-owned companies, for example, and some of the big markets. For us, we can see a better opportunity in private sector companies in many of the markets within Asia. And the second reason is one that applies to all markets really, is that the index is backward-looking, it is looking at the market cap of today, but basing the companies and the index off that. But when we are in an environment where we are seeing industries challenged, whether that is the Amazon effect globally, whether it has been telecom has been disrupted as we have seen over the last decade, things are going to change dramatically going forward. So I would not want to allocate my capital just based on current benchmarks, because we see things changing very quickly in Asia.

In short, 2018 looks very positive for Asia. Again, in the environment that you are seeing double-digit earnings growth, typically the asset classes have performed well. The corporates that we are meeting are still very upbeat and still very positive. And I think there is scope for upside surprise. Markets like India disappointed last year in terms of its earnings. So I think there is a good chance for Indian corporates, for example, within Asia to rebound in terms that their rate is of their earnings growth.

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