The market that the experts are backing over the US for 2015
19 February 2015
Asian stocks have rebounded in recent months following a thorny few years and some investors are expecting further upside.
“People get dollar signs in their eyes when they look at Asia” is how Andrew Graham, manager of the Martin Currie Pacific Investment Trust, put it.
However, a host of worries have held back the region’s markets in recent years as the slowdown of Chinese growth, its economic engine, and the threat of various crises have loomed on the horizon.
That said, sentiment is shifting back towards the region with the likes of Threadneedle and BlackRock taking a house view that its markets will offer material returns over those seen in US stocks over the past few years.
Threadneedle chief investment officer Mark Burgess says that following a long period of underperformance, valuations are looking more and more attractive in Asia leading the firm to bring down exposure to the US and buy into Asian stocks across portfolios.
“Whilst there are a number of obvious losers in the region as a result of the oil price fall, there are many winners and we are increasingly finding interesting investment opportunities. As a result we have moved overweight the region for the first time since 2013,” he said.
US stocks have trumped Asian stocks since the post-financial crisis rebound in 2009, but over the longer term the region has been the best place to be as countries, most notably China, have undergone enormous economic growth and reform.
According to FE Analytics, the MSCI Asia Pacific ex Japan index is up 200 per cent over the past decade, more than 50 percentage points than the S&P 500. However, it has been significantly more volatile with a much higher level of drawdown.
Performance of indices over 10yrs
Source: FE Analytics
Jeremy Roberts, head of UK retail sales at BlackRock, says the Asian recovery is set to play out as a key investment theme in 2015 and professional investors are leading the pack to capture the upside.
He says that according to a recent survey of London-based wealth managers and financial advisers, 61 per cent were intending to increase their clients’ exposure to Asian equities in the near future.
In May 2013, in what was called the ‘taper tantrum’, the hint of an end to US quantitative easing by the Federal Reserve prompted a broad sell-off of Asian shares with every fund bar one in the IA Asia Pacific ex Japan losing money for the next year.
The average fund in the sector was down 8.09 per cent over this period while the index lost 7.13 per cent but the Hermes Asia ex Japan fund made 9.71 per cent.
Performance of sector and index since 22 May 2013
Source: FE Analytics
Alan Higgins, UK chief investment officer for Coutts, says fears of slowing growth and ongoing geo-political tensions dampened demand for assets perceived to be riskier last year, but adds that valuations have become very favourable compared to major developed markets with the potential for earnings growth increasing.
“Stimulus measures, such as interest-rate cuts in India and Singapore and liquidity injections in China, have combined with lower oil prices to reinforce our positive outlook for the region,” he added.
Andrew Swan, manager of BlackRock Asia fund, also believes that reforms aimed at transitioning China from a high-growth and export-led economy to one with a greater focus on domestic consumption has lowered expectations but should in fact help returns grow in coming years.
“The Chinese economy is in a multi-year slowing phase of economic growth and there are a number of issues, many self-imposed, for example the corruption crackdown, which have slowed activity further in the short term and worried some commentators,” Swan said.
“This slowdown, however, should be looked at in a long-term context and we should recognise the fact that the denominator is growing to such a scale that a reduction in the rate of growth is inevitable.”
“I am therefore not excessively worried about the absolute fact that economic numbers are slowing but focus far more on the consistency and management of the slowdown to judge the government’s success.”
He says this will mean a painful transition but will result in positive long-term returns.
“Corruption is a blight on the economy and needs to be reduced and other reform measures, too, for example stock market and ‘hukou’ reform are positive developments for the long term. On these,
I continue to be encouraged by the rate of change. Examples like the stock market reform show good intent and a sense of urgency from the government which will help set the economy up for its next stage of rebalanced growth,” the manager said.
“Beyond China, I also continue to believe that governments around the region retain good scope to manage their economies through the turmoil of global economics. Oil price falls in particular have created a window for governments in India, Indonesia and Thailand to step away from expensive subsidy regimes which sets them up far better for the future, and releases funding for much needed infrastructure development, the cost of which has also fallen.”
Paul Hilsley, manager of the Legal & General Asian Income Trust, agrees that the Chinese long-term growth plan is working.
“The recent interest rate cut demonstrated that policymakers are willing to take serious steps to achieve the stability of growth that can provide a solid foundation for the government to work on ensuring employment and social stability. Without such, it would be difficult to advance necessary reforms and focus on the larger structural concerns,” he said.
“The recent fall in the oil price will also act to remove many of the shackles that have held Asia back in recent years. It will help to reduce inflation, improve current account deficits and will boost consumer and earnings power across the region. These positive steps towards cyclical and positive change are yet to be fully appreciated by investors.”
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