BlackRock Asia Weekly Market Views

Click here to see our latest Portfolio Manager views

Weekly Highlights

• Indian Finance Minister Arun Jaitley unveiled the country’s budget yesterday. Markets were looking for guidance on the government’s fiscal consolidation path, measures to address weakness in rural demand, banking sector recapitalisation plans and changes in government spending targets (particularly in the infrastructure sector and rural civil service wage hikes). There were no big surprises with Mr Jaitley outlining the continuation of consolidation and focusing on fiscal, investment and taxation reforms to enable higher economic growth. These included the removal of 13 different taxes which should help simplify the process of doing business as well as increased support for start-ups. Mr Jaitley also announced plans to double the income of farmers – who make up 10% of India’s population – over the next five years. Special efforts will be extended to improving irrigation, rural roads and ensuring all of the country’s villages has access to electricity.
• Indian equities underperformed the region in February on the back of global slowdown, commodity price declines, poor rural demand from the monsoon and high earnings expectations. Adjusted for these factors, the underlying economy remains steady and continues to strengthen as we start to see signs of resilience in urban demand and activity in the infrastructure related sectors. Despite concerns over lack of high profile reform progress, government policy remains supportive to growth. We have seen significant improvement in efficiencies, especially in the transparency of the government tendering process. Moreover, real interest rates continue to be high, with room for further RBI monetary easing. Therefore, despite high growth expectations, we still like India relative to the region because we believe the economy still has potential tailwinds versus most Asian economies, which face structural headwinds. However, we acknowledge that India is a well owned market with high growth expectations and therefore, we are selective with our stock picks.
• People’s Bank of China Governor Zhou reiterated that China has no intention of letting the renminbi depreciate sharply and will manage the exchange rate against a basket of currencies. This is in line with our expectation that a sharp devaluation of RMB against USD this year is highly unlikely, especially as the pressure on RMB against USD may ease if Fed turns more dovish. We also continue to see signs of China’s commitment towards reform and capital market liberalisation as the PBOC announced plans last week to open up the interbank bond market to qualified foreign institutional investors. We continue to see supply side reform as an incremental positive and a turning point that China is willing to bear the short term pains for long term benefits, and allow SOE bankruptcies and accelerate non-performing loan recognition. However, reform may be slower than expectations as China balances between reform, development and stability.
• With the world in de-risking mode, Asian equities are being shunned as an asset class. However, the extent of flows that have already left the asset class and the crowded defensive positioning provides some comfort that historical support valuation levels will hold again. This de-risking has been painful but history shows that such sell offs do provide opportunity especially if central banks pull back from the precipice. We believe that less divergence between central banks and a weaker U.S dollar would be helpful in dealing with the main risks overhanging markets : i) China FX policy; ii) China/Asia/EM credit slowdown; iii) soft oil/commodity prices; iv) a slowdown in the US; v) a slide in banking sector confidence centered in Europe.
• In terms of positioning, we have been holding cash levels low and have been increasing our exposure to the market as well as closely monitoring our factor exposures given the large momentum reversal in recent weeks (value outperforming quality/growth). We continue to add value where we have conviction. We also like select high quality names on a long term perspective, especially given their recent pull back. India and China remain our biggest overweight positions as markets where we continue to see opportunity as stock pickers.

Country views from the BlackRock Asian Equity Team