Asia Connect Q4 2017

20 Oct 2017

Asia:

  • Why any near-term correction in Asian markets should be viewed as a buying opportunity
  • How the centre of emerging market debt looks set to move east
  • Who is the rising force in the Indian equity market

 

China:

  • How China evolved from an innovation ‘sponge’ to an innovation leader
  • Our views on China’s progress on dealing with its debt risk
  • An article on China’s financial sector and its value

Asian equities take a breather, creating a buying opportunity

Asian equities performed well in the nine months to 30 September, returning more than 30% in US dollar terms. After such a strong performance, it is natural to assume some moderation towards the end of the year. The cushioning factor is that the H1 2017 gains were mainly driven by earnings revisions and currency appreciation, more so than higher valuations. Our Asia Pacific Equities team believes the acceleration of the earnings cycle over the next few years can support a continued strong performance. Consequently, we believe any pullback in Asian equities represents a buying opportunity for long-term investors.

Time for a breather

Asian equities have outperformed larger emerging and developed markets so far this year, with China offshore, South Korea and India as the top performers.

A combination of (1) earnings upgrades, (2) stronger regional currencies and (3) increases in price-to-earnings multiples from a low base was the main reason behind this regional rally. A number of key factors supporting this uptrend have remained in place: a weaker USD, China’s better growth outlook and improving results from supply-side discipline in Chinese companies.

After this year’s great rebound in Asian economic activities, we can expect momentum to taper off towards Q4 2017–early 2018, given the weaker commodity prices and the base effect of strong growth. The cycle of earnings upgrades in the two sectors (information technology and materials) that saw most of the increased forecasts appears to be softening.

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