Wall Street plunge provides buying opportunity in Asia: Matthews Asia

Robert Horrocks, chief investment officer at Matthews Asia, says small and mid cap stocks in the region have a lot more value compared to large cap stocks

PUBLISHED : Wednesday, 07 February, 2018, 7:26pm
UPDATED : Wednesday, 07 February, 2018, 7:26pm

Wall Street’s plunge this week could just be the start of increasing volatility in global markets this year and provide buying opportunities for smaller, mid-cap value stocks in Asia, where the earnings cycle is just beginning and due to the valuation differentials, according to Robert Horrocks, chief investment officer at Matthews Asia.

Asian markets are not immune to weakness in US stocks but value is likely to appear within the region, which is well placed because of the reflationary environment that should result in corporate profit growth matching or exceeding nominal gross domestic product growth over the next few years, he said.

“Better earnings cycle and a better ability to withstand inflation and cheaper valuations in Asia means it should do relatively well,” Horrocks said at a media briefing in Hong Kong on Wednesday.

Optimism is appearing in Asia primarily led by the economic policies of Chinese President Xi Jinping.

Asia policymakers have also been allowing wages to rise in the last five years for social stability reasons after the global financial crisis even though that has squeezed corporate profits. However, wage growth is starting to slow while inflation is ticking up, a gap that results in corporate profits, seen picking up for the first time last year.

Moreover, Asian markets are relatively cheap, at 14.5 half times valuations compared to 18-9 times in the US, Horrocks said.

In particular, small and mid cap stocks have a lot more value compared to large cap stocks which have rallied to levels far above their fundamental value as US investors typically bought into Asian stocks through passive flows and exchange traded funds in the past year or so.

A weak US dollar will also mean sustained flows into Asia. US and European investors are likely to develop core investments in Asia that will lead to a shift from passive funds to active investments that will support small and mid-cap companies, Horrocks said.

“As people start to see better, long-term earnings picture within Asia, they are more likely to use active strategies and that means more flows going into small and mid cap companies.”

Horrocks favours domestic demand companies in Asia with good earnings prospect and financials with a consumer focus, such as in mortgages, car loans or household debt.

He is cautious on fintech providers that have seen huge multiples and market cap based on their association with online distribution.

“There has been big mispricing in that particular part of the financial sector. The secret to running financial companies is managing credit and risk well. It has very little to do with distribution.”