Time to pick up emerging Asia equities again, say fund managers

PUBLISHED : Sunday, 01 May, 2016, 4:49pm
UPDATED : Sunday, 01 May, 2016, 4:49pm

It is time to reconsider Asia ex Japan equities despite existing uncertainties, given the alluring valuation and signs that China’s economy is stabilising.

“We are now selectively positive towards equities of emerging Asia markets excluding Japan,” said Ben Luk, global market strategist at JP Morgan Asset Management.

The low valuation, of around 1.3 price-book ratio after a huge sell-off is the fundamental reason attracting market watchers to Asian ex Japan equities again.

“Historically, when the P-B ratio fell below 1.5 in this market, we see 40 to 50 per cent return in the coming 12 months,” Luk said.

Joshua Crabb, Old Mutual Global Investors head of Asian equities, said current valuations are close to 1.1 times the P-B during the 2008-2009 global financial crisis. “Investors have been negative for a long time, but the situation is certainly not as bad as in 2009. There are opportunities in Asia,” according to Crabb.

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Emerging Asia markets witnessed a huge outflow of US$38.6 billion last year, EPFR Global data showed. That was amid expectations on interest rate rises in the United States, weak economic growth, and a plunge in regional currencies following the sudden depreciation of the yuan by the People’s Bank of China last summer. The outflow has slowed to US$6.1 billion so far this year. There were, in fact, signs of inflow in March, Luk said.

China’s better-than-expected economic data in the first quarter, with the yuan stabilising, is likely to have a spillover effect on Asian peers, Luk said, favouring original equipment manufacturers (OEMs) in Taiwan, as well as Korean companies in refinery and processing sectors.

The consensus earnings growth estimates of 6.3 per cent for emerging Asia are credible, while there may be potential for positive surprises, AXA Investment Managers said in a note.

In a new report, Bank of America Merrill Lynch said it has shifted its five-year bearish views on Asia ex-Japan and emerging markets equities to “structurally bullish”.

“Monetary policy in China is working exactly as it should – by boosting property prices. Imposing negative real deposit rates of -0.8 per cent on China’s savers to financially repress them makes sense, given China’s 250 per cent non-financial sector debt to gross domestic product. Don’t fight this,” BAML equity strategist Ajay Singh Kapur wrote in the note.

“The staples, health care, utilities, telecoms, internet and software sub-sectors (SHUT-I) have outperformed cyclical stocks by 35 per cent in emerging markets since 2011 as the US dollar strengthened and inflation fell. We think it is time to reverse this stance. Buy cyclical stocks and sell SHUT-I,” said the investment bank, which has an “overweight” on Taiwan, Australia, China and Indonesia.

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Yuan-denominated A shares in China will benefit from domestic stimulus this year, especially the property sector, but it remains uncertain whether the rally is sustainable, Luk said. “For the long term, we still overweigh China’s ‘new economy’ sectors such as consumer and internet,” he added.

The ending trend of US dollar strength gives them confidence that more capital will flow back to the emerging markets.

Although Indonesia has cut its interest rates for three months in a row this year, the rupiah has been resilient, strengthening 4.5 per cent against the US dollar so far this year, which implies the US dollar may have stabilised even though a rate rise will come in the future, Crabb said.

The US dollar index has softened from its December peak of 100.17 to 93.5 at the end of April, amid the rise of euro and yen and the dovish stance of the US Federal Reserve.

Despite the opportunities, uncertainties still exist in emerging Asia. Whether China’s economic growth is sustainable and whether a interest rate rise in the United States, possibly in the second half, will lead to a jump in the greenback are risks worth monitoring, Luk said.