China Stock Turmoil 2015

Post-equities slump investors look again at Asian markets

PUBLISHED : Friday, 06 November, 2015, 8:32am
UPDATED : Friday, 06 November, 2015, 8:32am

Is a recent upturn in regional Asian stock markets a sign the worst is now over; some analysts seem to think so.

Asian markets have risen more than 10 per cent since a mid-August trough, as tracked by the MSCI Asia Ex-Japan index, with investors taking heart from the decision to postpone US interest rate changes, and a sudden resurgence in Chinese equities after three months of brutal selling.

Stable US and European growth figures, break even inflation, and higher oil prices are also helping raise confidence levels, analysts say.

And even when US rates do start to rise, “emerging markets will likely benefit from moderate US growth,” wrote Jens Nystedt and Teal Emery at Morgan Stanley Investment Management.

“A narrative where bad US data is good news for the (emerging market) asset class at this stage of monetary policy is debatable,” the two wrote. “A Fed hike would ultimately be a positive catalytic event…as long as it takes place in the current environment of moderate growth and minimal inflationary pressure.”

Investors poured US$1.2 billion into emerging market equity fund in the last week of October, the largest amount in 16 weeks, data from investment bank Jefferies showed, with weekly average inflows into global equity funds in general, recovering to just below pre-crash summer highs.

Credit Suisse’s wealth management division last month raised Asian emerging markets to “outperform” while China’s main Shanghai Composite index is brushing against the 20 per cent upside level from August lows – one definition of a bull market.

Part of a wider trend among tracker managers to apportion higher fund percentages to the mainland Chinese market, US based Vanguard, one of the world’s largest money manager with US$3.2 trillion under management, announced this month it will start to increase its emerging market tracker fund exposure to Chinese A shares,.

Predicting a 66 per cent chance large cap US stocks will tick higher before year-end, analysts at Fitch Group owned BMI Research say broader emerging markets will likely outperform US markets given the blue chip heavy MSCI EM Index is trading at a 50 per cent discount to the S&P 500 in price-to-book terms.

“Sentiment and positioning also heavily favour EM stocks from a contrarian perspective. While the sense of crisis surrounding EM has waned, despondency still reins across the board,” a recent BMI report said.

Asian markets were lifted recently by prognostications from Chinese president Xi Jinping that national economic growth would remain around 6.5 per cent for the next five years.

That said, deflationary pressures are still a risk for China, wrote Nystedt and Emery, with the country’s industrial sectors struggling with overcapacity. The two Morgan Stanley analysts expect ongoing monetary easing and fiscal stimulus will be used to boost growth and inflation.

Core inflation across emerging Asia is likely to stay around 2 per cent, according to researchers at Capital Economics, and is unlikely to pose a major risk to economic growth.