We maintain our constructive view toward Asian equities, which centres on our outlook of strong domestic growth, attractive valuations and improving earnings fundamentals.
Asian equities outperformed in the first six months of 2017, with strong returns attributed to a number of positive developments on both the macro and company earnings fronts. With regard to the former, a stronger US economy and stabilization in Europe have underlined the recovery in global growth.
The bottoming of China’s economic slowdown has provided another much-needed boost to sentiment. The bounce in activity, with exports beating expectations and – more importantly – positive domestic demand growth contributed to the outperformance of Asian equities. The recovery in earnings fundamentals within the region was another significant driver of returns, as markets have witnessed an emerging trend of upward earnings revisions since the second half of last year.
Asia currently enjoys a generally strong, stable and predictable growth profile largely due to its resilient domestic demand. Stronger trend in domestic demand growth fuelled by the positive demographics and rising income remains a structural positive catalyst for longer-term economic momentum and equity market performance. In addition, across the region a pro-growth fiscal policy stance among policymakers also continues to serve as a favourable economic driver, while a benign inflationary backdrop provides central banks with room to manoeuvre with regard to monetary policy. The increasing popularity of an ‘equity culture’ in Asia will also help regional economies and financial markets to develop and mature.
Asian earnings fundamentals are recovering after many years of stagnation, especially now that China’s economic slowdown appears to have bottomed. We believe upward earnings revisions will likely be supported by a number of factors, including:
- A recovery in nominal GDP backed by improving earnings among financials and a pick-up in PPI (producer price index)
- A cyclical uptick among key sectors, such as information technology, which is largely driven by capacity cuts, in conjunction with resilient demand
- Recovering economic growth in the EU
- A low base effect
Last but not least, the valuation of Asian equities relative to the MSCI World remains attractive on both a price-to-book and price-to-earnings basis. While valuations have increased slightly from low levels, they continue to hover in ranges well below historical long-term averages, despite the overall strong equity market performance since the beginning of 2017.
HyungJin Lee is head of Asian equities at Barings.
