Asian equity markets are in the stages of a recovery with more cyclical areas of the market set to strongly benefit, according to Andrew Swan, head of Asian equities at BlackRock.
The Asia ex Japan equity market has been a laggard when compared with other major developed markets over the past year in contrast to its strong performance over 10 years, in which it has been bettered only by the S&P 500.
Performance of indices over 10yrs
Source: FE Analytics
Asia stocks have been impacted by the strong bearishness that hit markets last year resulting from uncertainty surrounding the health of the Chinese economy, and its potential for contagion to the wider region.
Many have drawn comparisons with the 1997 Asian financial crisis, but Swan who is also manager of the BlackRock Asia and BlackRock Asia Special Situations funds argues the time might is ripe to buy Asian equities.
“History shows that it pays to be brave during times of extreme pessimism. It may feel counter-intuitive, but we think the time is ripe to buy Asian equities. A review of the past 40 years suggests that whenever Asia ex Japan markets trade between 0.9 and 1.4 times price-to-book, investors have subsequently benefited from strong markets for 80-90 per cent of the following 12 or 36 months,” he said.
“This trend can be identified through the various crashes and sell-offs that Asia has experienced over the past 40 years, not least the 1997 financial crisis. As Asia ex Japan markets are currently trading around 1.2 times price-to-book, starting to recover from January’s lows, we think there is a compelling case to invest now.”
“So how can you tell if Asian equities are a bargain or a value trap? Over the past three years, I would have suggested the latter.”
“Asian stocks looked cheap, yet this proved illusory, as companies faced pressures on profits as a result of slowing nominal GDP growth and margin pressure. The region thus failed to meet expectations and developed markets have broadly outperformed Asia and emerging markets as a result.”
The MSCI Asia ex Japan index is up more than 10 per cent over the past three months with the average fund in the IA Asia Pacific ex Japan sector returning 9 per cent, though the likes of Newton Asian Income and Fidelity Asia Pacific Opportunities up more than 15 per cent.
Performance of funds, sector and index over 3 months
Source: FE Analytics
While Swan is not expecting earnings in the region to recover intensely, he thinks valuations suggests the market is heavily oversold.
“We believe there is better alignment amongst central banks – following the Bank of Japan’s unsuccessful attempt to go it alone with the introduction of negative rates – can provide further support. Meanwhile, the recent weakening of the dollar gives Asia some breathing space to implement the right mix of monetary and fiscal policy and bolster growth.”
“We are still finding opportunities in China, ranging from growth companies in the e-commerce space through to value stocks that can benefit from supply-side reform. Energy companies, post the recent fall in the oil price, offer good value in our view.”
“Similarly, we believe fears in India have been overplayed. Although it is one of the more expensive markets and there is scepticism due to the political logjam, if you peel away the surface, you can see Narendra Modi is driving reform in certain sectors.”
Indeed India funds, have been one of the best performing parts of the investment market in the past month with the best performers – Jupiter India Select and Jupiter India – up more than 7 per cent.
Performance of funds and index over 1 month
Source: FE Analytics
Swan continued: “Positive initiatives are under way in the energy sector, for example. Around 300 million Indians still do not have access to electricity. So the authorities are removing the logjams to ensure there is enough coal supply to boost generation capacity. Elsewhere in the country’s stock market, we like autos and telecoms.”
“Asia and especially China is at a crucial juncture. Growth expectations are slowing and the Chinese authorities face a challenging path ahead. What matters from here is the implementation of reforms and getting the currency under control in the short term.”
“We expect growth to pick up over the next six months, and hopefully this will surprise markets on the upside.”
Ben Willis (pictured), head of research at Whitechurch Securities, is also expecting Asia ex Japan to be good source of returns in the coming years.
“The deferring of a US interest rate rise [in March] helped strengthen emerging market currencies and commodity price stability helped many of the hardest hit emerging markets over the month; Brazil and South Africa in particular. Despite the recent rally in these markets, there remains a healthy amount of pessimism priced into Asian and emerging markets,” Willis said.
“These markets will remain volatile, but valuations are still attractive compared to developed markets, and to history. These markets still have some catching up to do and we believe Asia and emerging markets equities could prove to be a good recovery opportunity for long-term investors if investing at current levels,” he added.
