Asia still has much to interest investors

Mixed signals from Asian economic data and stock markets that have just ended a year with some of the strongest rallies in recent history do not make an obvious combination of buy indicators.

If the weak final reading of the latest HSBC purchasing managers index (PMI) for the mainland is anything to go by, economic contraction is on the way, which in theory sets a poor backdrop for stocks.

But the pressure a slowdown puts on policymakers to provide support for growth - recall the sudden rate cut in November and the expectations building for further easing in 2015 - means the stock market should react positively.

For H shares in Hong Kong, the valuation discount compared to their A-share counterparts on the mainland is getting wider after the latter surged 44 per cent in the fourth quarter of last year. This creates an opportunity for H-share investors to position for a catch-up rally.

Falling global crude oil prices, meanwhile, should see Asia as a whole benefit.

In Indonesia, fuel subsidy cuts first unveiled in November are being extended. They will drop to US$1.4 billion, or 0.2 per cent of gross domestic product this year, from the US$23 billion, or 2.4 per cent of GDP, estimated in the original 2015 budget.

This opens up significant room for the government to spend money on infrastructure, which will support higher GDP growth in the coming decade.

India, meanwhile, has one of the region's best growth-inflation dynamics.

Consumer price inflation has moderated to 4.4 per cent year on year and manufacturing activity, as measured by the PMI, is signalling solid expansion and running at a two-year high. That's as many markets in the region struggle with decelerating growth.

India also has the largest amount of young labour entering the workforce anywhere in the world in the coming decade.

It has one of the lowest credit penetrations in Asia and is entering a phase of accelerated structural reforms.

This is a sweet spot. The slight premium in equity valuation of about 15 per cent is far from excessive historically.

In developed Asia, Japan sees continuous signs of turn around. Japanese Prime Minister Shinzo Abe has a clear mandate to move forward with his aggressive economic recovery plan, which includes government expenditure, unprecedented monetary easing and business deregulation to get the country out of its malaise.

This should eventually translate into wage increases and a pick-up in domestic consumption.

We expect the corporate reform story in Japan to remain bullish. Companies from sectors such as banking and technology are restructuring in a bid to raise efficiency.

There are signs that businesses are cutting redundant positions and hiring young people.

Even Australia has potential. It has a growing population, it is connected to fast-growing Asia and it has abundant resources. That's a combination that should generate employment and prosperity over the long term.

Yes, a decline in mining activity has created immense challenges for growth in the near term, but central bankers have indicated that if policy easing is required it will happen.

Arthur Kwong is head of Asia-Pacific equities at BNP Paribas Investment Partners