Asia market views

Key takeaways

  • US headlines have had little impact on global risk appetite
  • China signs deals with 68 countries in the hope of expansion
  • Taiwan could face long term risks despite short term flows

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Asia is gaining on back of strong earnings

Asian equities gained despite political headlines from the US as global risk appetite continues to be elevated and earnings (particularly within the Energy sector) continue to be revised up. We continue to see strong foreign inflows into EM Asian equities led by Korea and Taiwan.

Is China is on the road for trade expansion?

The One Belt One Road (OBOR) Forum concluded last week with China signing deals with 68 countries and international organizations in hopes of fostering trade and connectivity between Eurasian countries. We view this initiative as a long-term strategy from China to expand its sphere of influence across Asia and the world. However, it is not clear at this stage how large the economic benefits for China could be. Indeed, at this early stage many countries have shown interested in the prospects of benefiting from Chinese investments and financing but might not be able or willing to commit to financial participation from their side. The returns generated from many OBOR-related projects might end-up being more political than purely economic. We therefore believe that China will now engage in a fairly long assessment phase, as its leadership needs to conduct deep negotiations to estimate which projects can generate the political and economic IRR it feels adequate. We therefore feel that OBOR is an important and symbolic step that illustrates China's growing weight in the world’s affairs. However we believe the near term impact is limited and that there is still a long way to go before OBOR can become a material investment theme for our portfolios.

Reforms still generating investment returns

We continue to structure our portfolios towards sectors that benefit from current reforms and structural changes, which we see as one of the most sustainable sources of investment returns. In particular, we are increasingly positive on China’s steel industry on the back of recent shutdown in capacity and expectations of further shutdowns to come. We also think that concerns around property market tightening has largely been priced in.

Cautious on Taiwan due to long term risks

Despite continued foreign inflow into Taiwan, we remain underweight Taiwan in our regional portfolio. We think Taiwan faces longer-term de-rating risks as China continues to build up its semiconductor/smartphone production capabilities. Moreover, Taiwan continues to face an aging population and see outflow of its young population. Domestic consumption also remains weak in Taiwan and we expect further weakness as tax reforms on property and inheritance are rolled out. As a result, our exposure to Taiwan have very much been from a bottom up perspective and we have been selective in the stocks that we own in Taiwan. We have mostly been exposed via niche players in tech (e.g.: companies that benefit from dual cameras and the automation trend).

Country views by BlackRock Asian Fundamental Equity Team

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