For qualified investors

Asia market views

14-Aug-2017
By BlackRock

Key takeaways

  • All eyes on Korea around tax and tensions
  • India’s pullback due to regulatory bans
  • Structural case for Asian optimism

Explore our views in more detail

 


US/Korea tensions suppress markets

Asian markets took a step back in the past two weeks as stocks from emerging markets (EM) and Asia underperformed falling global equities. Global markets retreated with their biggest loss since May as tensions between the US and North Korea persisted. Investors sought safer havens as volatility spiked higher than the highs witnessed around the US election. In Asia, India and Korea led the pullback while Association of Southeast Asian Nations (Asean) markets were more resilient, resulting in outperformance from Hong Kong and Malaysia so far in August.

Markets have been unsettled by increasing rhetoric around the possibility of military action in the Korean peninsula following the imposition of sanctions against North Korea, led by the United Nations (UN). In our view, this is clearly an escalation that will raise the cost to North Korea of its actions although doubts remain over how effective the implementation of sanctions might be and over any potential nuclear conflict.

Keeping one eye on China

As regard the investment implications we see a few scenarios, including a possible temporary short-term rise in the risk premium, which may induce profit-taking if Korean equities record a strong run in H1. Ultimately we think other factors matter more for Korean equities, such as the health of the global and Chinese economies and corporate governance in the region, therefore see no meaningful action at this point. One issue worth monitoring is if China fails to cooperate with UN sanctions then US/China trade tensions can could again become a major issue with implications for various subsectors in China, especially primary metals and capital goods.

The Korea market has also felt the impact of the government’s plans to raise the highest income tax rate from 40% to 42% and the large corporate tax rate from 23% to 25%. Large-cap Korean stocks were hit hard while construction names were hit harder, dropping on further property measures aimed at curbing housing prices.

The pullback in India was driven by declining sentiment after the Securities and Exchange Board of India (SEBI) identified 331 companies as suspected shell companies, in turn issuing bans. Select earnings misses also weighed on the market. That said, earnings releases for Asian companies have generally been positive in Q2. Just over half of companies (51%) have now reported, with year-on-year profits up 23% for the calendar year ending in Q217, tracking in line with full-year Bloomberg estimates.

GDP, earnings and flows remain promising

However, the positive strategic case for the region remains intact. The macroeconomic growth environment is sound with both real and nominal GDP expansion expected this year and next; corporate earnings growth is rebounding to the mid-teens range this year and close to 10% in 2018 after six years of just 2% average growth; valuations are at the high end of their 10-year range but are not excessive in absolute terms; and fund flow and positioning levels suggest potential for further buying, both by domestic as well as foreign investors.

Country views by BlackRock Asian Fundamental Equity Team

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