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Why it’s time to buy Asia funds and sell the US and Europe

14 July 2014

Eastspring’s Robert Rountree thinks Asian equities have hit a sweet spot for both growth and income investors.

By Daniel Lanyon,

Reporter, FE Trustnet

The depressed prices in Asian equities caused by the tapering of the Fed’s QE programme have reached an inflection point, presenting investors with a significant buying opportunity.

This is according to Robert Rountree, global market strategist at Eastspring Investments, who says the recent upturn in Asian equity markets is just the beginning of a longer-term trend and that investors should rotate back into the sector and out of developed world equities, where many of them fled to escape the sell-off in 2013.

“Asia’s cheaper equity markets look attractive - large pricing anomalies resulted from 2013’s rush to US and European equities,” he said.

“These will not last forever and Asian equity dividend products are an option while waiting for the rallies,” he said.

“Today, half way through 2014, those dynamics are not only ending but reversing in Asia’s favour. Europe’s growth outlook, for example, is stabilising, as is the US's. The economic pendulum is poised to swing in Asia’s favour as US and European growth upgrades stall.”

“Investors’ fears are focused on the US and Europe, such as will Europe avert deflation? Is US growth as strong as forecast? And will rates remain low for longer than thought owing to this slow recovery?”

Since the sell-off in May 2013 the MSCI AC Asia index is down 8.32 per cent.

A faster recovery is evident in China than Japan, as can be seen by the performance of the MSCI China and MSCI Japan indices over the same period.

Developed markets have rallied, with the S&P 500, FTSE All Share and MSCI Europe ex UK all up, although they have started to fall over the past six weeks.

Performance of indices since 22 May 2013

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Source: FE Analytics


Rountree says the wider Asian equity market could be due a sharp upturn similar to the reverse in market movement Japan saw between 2012 and the sell-off in May 2013, as sentiment quickly changed following its so called lost decade.

However, he says Japan still looks attractive and that the past decade’s corporate restructuring was largely overlooked and is paying off.

“If Asia’s equity markets look attractive, a powerful pricing case for the swing-back falls into place. Cheap, mispriced markets may remain cheap for some time; when recognition arrives, the bounce-back can be fast and strong, as Japan all too clearly illustrated in 2012/13.”


While emphasising the growth story, Rountree says Asia’s high yielding, lowly valued cyclical stocks may also be a good income play, beating Asian bond yields. He also thinks they could offer decent levels of growth.

“Asian and Japanese valuations fell as earnings were delivered. Among the emerging markets, Asia stands out as being the only region to deliver positive profits growth,” he continued.

In comparison, Rountree says the US rally since 2012 was mostly due to rising expectations whereas the eurozone’s entire rally was due to rising optimism.

Performance of indices over 2yrs

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Source: FE Analytics

With this in mind, he says 2014’s earnings forecasts must deliver to keep sentiment strong.

“While the US March quarter earnings have been encouraging, they still reflect, in large measure, falling costs and share buy-backs.”

“Aggregate corporate sales remain sluggish. European March quarter earnings announcements were even less encouraging. In both cases, good purchasing managers index new order data must translate into actual orders; there are few signs of this happening yet.”

“US and European equities could still rise, but it is imperative that declared earnings meet growth forecasts - rising valuations mostly drove the 2013/14 rallies, especially in Europe. Earnings must deliver to sustain these rallies, though high liquidity should provide support. Value seems the way forward.”

Roundtree says that while Asia’s markets do carry risk, much of it is priced into equity valuations because they are longer term in nature.

“From 2011 until recently, investors in Asia took fright for a variety of reasons. Asian growth fears in general, China’s shadow banking system, its property market and economic restructuring, India’s persistent inflation, Indonesia’s and India’s emerging trade deficits and question marks generally over profit forecasts were but a few examples.”

“Most Asia concerns are long-standing – it is fair to assume that they have been discounted and European and US equities, while not expensive, are no longer cheap.”

Jason Pidcock, manager of the five crown-rated £4.6bn Newton Asian Income fund, also expects sentiment towards the continent to increase. He recently told FE Trustnet the recovery in Asian equities was at a very early stage.

The fund has been a top quartile performer in the IMA Asia Pacific ex Japan sector since its launch in November 2005, with returns of 170.62 per cent.


Performance of fund, sector and index since Dec 2005

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Source: FE Analytics

The fund offers exposure to Asian markets such as Thailand, Hong Kong and Singapore. However, Pidcock’s largest regional exposure is Australia, which makes up 34 per cent of the portfolio.

Its ongoing charges figure (OCF) is 0.82 per cent. It is yielding 4.58 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.