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Asia market views

By BlackRock Asian Fundamental Equity Team
08/mei/2017 / By BlackRock

Key takeaways

  • Asia continues to outperform developed market peers
  • Improving outlook for Malaysia as a result of currency policy and strengthening trade
  • China remains strong, despite financial sector deleveraging

Explore our views in more detail

 


Asia gains despite geopolitical uncertainty

Asian equities rallied, continuing to extend the outperformance over their developed market peers. Encouragingly, Asian/EM equities have not underperformed despite rolling PMIs, geopolitical issues (French election, UK snap election announcement, North Korea’s resumed provocation) and fading belief in the Trump stimulus. We continue to see strong foreign inflows into EM Asian equities led by Korea and Taiwan.

Policy makers in Malaysia ramping up
currency demand

We are starting to turn more positive on Malaysia, after a long period of no exposure. A lack of confidence in the political regime has kept many investors on the side-lines, cautious of the implementation and sustainability of any structural change. We previously viewed Malaysian equities as expensive, relative to growth opportunities, with local pension funds keeping valuations elevated. The Malaysian ringgit has been one of the worst performing currencies in Asia over the past six months and while the government’s reaction to the fall helped control currency declines, they also dampened interest from overseas investors who found it harder to hedge their positions. However, policy makers have, in recent months, introduced a number of new measures to revive interest and deepen the country’s onshore financial market. The government encouraged investors to hedge their currency exposure onshore, ordered exporters to hold at least 75% of export proceeds in ringgit while the central bank also liberalised short selling of government bonds by residents and allowed foreign investors to actively hedge 100% of their underlying assets. We view this as a positive step forward for the ringgit liquidity and sentiment.

Malaysian equities looking attractive on signs of improving economy

Malaysia’s economy is also showing signs of improvement on the back of the crude oil price recovery and as the global economy stabilizes. We continue to see strength in its trade surplus, where exports have benefited from the weaker currency, marking a cyclical upturn. Overall, we view this improvement in trade as consistent with the overall macro narrative that growth this year should stabilize, if not improve, from the prior year. As a result, we think Malaysia is starting to look attractive as its valuation premium over the region has receded as Malaysian equity markets have lagged the region in recent times. In terms of positioning, we prefer to be exposed to Malaysia via cyclical industries such as the auto sector and banks, as well as construction names.

Reforms in China continue to be positive for
the region

We continue to be positive on the progress China is making on its reform path, which we think has been underappreciated by the market. Steel and coal capacity has been cut meaningfully; steel supply cuts even exceeded the 2016 target. While the government is looking to tighten the property market and some market choppiness is expected as the government makes progress on financial sector deleveraging, we think ongoing infrastructure spending and continued cyclical momentum in the Chinese economy should help offset the volatility. We remain constructive on H-shares' medium- to long-term upside potential vs. A-shares given the H-shares’ relatively cheap valuations and potential to benefit from the Shenzhen-Hong Kong Stock Connect over time. Southbound flows from the mainland into Hong Kong have been very strong year-to-date and are likely to continue.

Country views by BlackRock Asian Fundamental Equity Team

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