- Reflation and value sit behind recent sector gains
- Power and energy in India set to benefit from reform
- US protectionist threat hangs over the region
Global risk-on mood buoying Asian equities
Asian equities gained in the past two weeks on global risk-on sentiment and continued to benefit from the reflation and value trade. We continue to see small inflows into global emerging markets.
In India, the government presented its annual Union Budget and continues to emphasise the balance between growth and fiscal prudence (targeting a fiscal deficit of 3.2% of GDP, down from 3.5% last year). Boosting the rural economy as well as providing affordable housing continues to be areas of focus. Reserve Bank of India (RBI) also surprised the market by keeping policy rates unchanged and shifting its stance from accommodative to neutral due to inflation concerns. Instead, the focus was on bringing down inflation to 4%. Overall, we think India is on the right track towards sustainable growth and while it may experience short-term pains, we remain positive on its long-term growth trajectory. Specifically, we are optimistic on sectors that benefit from long-term growth as well as those which benefit from reform, such as names within the power and energy space.
In terms of our region, Asian earnings are finally starting to recover after five years of stagnation. This is being driven by a combination of the global and regional cyclical upturn as well as necessary cuts to corporate capex, which are helping margins. The continuing recovery of nominal GDP growth in China should not be underestimated for its impact on lifting the whole region. This is placing Asia in a much more attractive position than it has been for some time. While still early on, the earnings season YTD has been the best since 2010 (Source: Credit Suisse), with consensus earnings revised up by almost 5%. It is worth noting that this is being led by cyclical sectors such as energy and materials, and also by Korea.
Trump’s protectionist threat looms
Trade protectionist measures remain a key risk for the region. This overhang has been having a negative impact on investor sentiment and positioning. Geopolitical and security issues are potentially increasing for the region and will need to be carefully monitored although it is too early to draw conclusions. We believe Donald Trump is unlikely to enact extreme trade protectionist policies given the US’s heavy reliance on the complex and mature Asian supply chain, the difficulty to replicate the supply chain in the US in the short term or even longer term, and the fact that US consumers would be hurt deeply from such irrational tariffs. However, we do think various forms of milder trade protectionism policies, such as border tax adjustment, will be implemented.
China is likely to be one of the countries that will be most adversely affected by tightening US trade policies given the large trade deficit that the US runs with China. However, the impact of trade protectionist policies on China could be more muted than investors might expect. China could fire up its reform engine to accelerate economic transition to a domestic consumption-driven model in order to further reduce reliance on exports. It is worth noting that any trade protectionist policy is likely to have rippling effects beyond China across the entire Asian supply chain. China’s role is often that of an assembler and imports close to 50% of intermediates from the rest of Asia. Further, Asia accounts for eight of the top 15 countries with which the US runs a goods trade deficit and given Asia’s role as a major global trade hub with its intertwined, intraregional supply chains spanning a number of economies, we acknowledge that impact on the region could be significant.
Value to be found through selective stock picking
Valuations in the Asian markets remain below long-term historical averages and already largely reflect negative sentiment and positioning. Asian investors remain overweight consumer and defensive sectors, while being underweight cyclicals and financials.
We are and will remain focused on stock selection as we see return potential from asset allocation, both at the country and sector level, as relatively muted.
In onze ogen kunnen de Aziatische aandelenmarkten op langere termijn sterke rendementen opleveren.
Donald Trump zal vanaf januari een van de machtigste mannen van de wereld worden. Hij heeft tijdens zijn kandidatuur voor het president...
Azië biedt voor de selectieve belegger veel interessante kansen. Lees meer daarover in het artikel dat eerder in deze serie verscheen. ...
De regio Azië biedt een hogere economische groei dan in de rest van de wereld. Daarnaast voeren een aantal landen hervormingen door die...