Head of Asian equities at Barings Hyung Jin Lee looks at the Asian equity markets for 2017 and beyond.
- In Asia, there is an old Chinese curse ‘May you live in interesting times’, which is not the contradiction that it first seems. In fact, the expression highlights that although momentous times may make for great history, they are perhaps less auspicious as actual lived experience.
- In our view, however, today’s ‘interesting times’ may not be a curse at all, but a time for seizing opportunities. We invest for the longer term and believe that 2017 may provide fertile ground for finding attractively priced companies that offer both compelling valuation upside with a strong earnings growth profile.
- While rising uncertainty may lead to higher volatility, we remain realistic and not pessimistic on the outlook for Asia and its strong underlying growth fundamentals.
Interesting times and old fashioned growth
Many will wonder whether fresh forces will emerge this year to reshape markets and sweep away the new normal of yesteryear. With politics upended in the developed world and US interest rates on an upward trending course, views diverge on the outlook for 2017. Indeed, today more than at any time in recent memory it seems we are living in ‘interesting times.’ Yet the seemingly positive intent of this old Chinese expression belies its true meaning. It is not a blessing, but a curse that carries with it a sense of foreboding and suggestion that the high drama witnessed in eventful times augurs badly for wealth creation and prosperity.
However, in our view today’s ‘interesting times’ may not be a curse at all, but rather a time for seizing opportunities. We have often said that Asia remains one of the few major investment areas where the key equity market drivers are ‘old fashioned’, relying on economic and corporate earnings growth as opposed to commodity cycles, monetary and fiscal policies. These old fashioned drivers are still very much at work, underpinning the region’s ongoing transformation. Here, we find enduring structural growth drivers including demographic changes, rising income levels and the emergence of innovative world class companies.
As active managers taking a bottom-up approach, we are able to pinpoint what we believe are the most attractive areas of growth and to access this at the company level itself. For instance, in the consumer space we are seeing a transformation in retail thanks to rising incomes. We are seeing opportunities in modern convenience stores rolling out across Southeast Asia as well as the growing use of social media for businesses to market and sell to their customers.
Thus even as we see a reappraisal of risk and reward, with the US equity market rallying in recent months on prospects for tax cuts and deregulation, the oil price rebounding from historic lows over the past year and the market re-rating Russia, we continue to believe that the investment case for Asian equities remains compelling.
The China factor
As the region’s largest market, developments in China will be key to the performance of the Asian equity market in 2017 and beyond. Indeed, the moderating rate of growth may pose challenges, but with real GDP estimated at around 6% last year it is still higher than other major economies. Moreover, the latest trends from the country’s Purchasing Managers Index survey for manufacturing indicate that China may be coming out of the bottom end of the cycle and bouncing back. Positively, stronger economic activity in China could create a favourable tailwind to other Asian markets to which it has strong economic ties throughout the region from the ASEAN region to Korea.
We are not wide-eyed optimists. We think we are able to see the potential for pitfalls more clearly and quickly than most, but we know that a realistic appraisal of risk can help to avoid these and lead to better investment outcomes.
The trade policies of the new administration in the US are perhaps foremost on investors’ minds at present. We are keeping a watchful eye on developments here and while it is unclear what changes the new administration will make to trade policy, we would note that all indications from the Chinese leadership have been for a continued push toward open and free international markets.
Federal Reserve hikes to interest rates and a strengthening US dollar have traditionally been negative for risk assets, such as emerging market equities. However, when rates rise in response to price changes from accelerating business activity, as we may well see in developed markets, this has actually been positive for Asian economies historically. So all else being equal, rising rates do not necessarily disadvantage risk assets.
Similarly, when casting an eye to commodities, it is true that Asia is a price taker rather than price maker for many internationally traded raw material goods, but the price increases we have seen are still well below the levels registered during the height of the ‘super cycle’, when many of these economies were growing at a brisk pace.
As regional specialists our dedicated research teams cover the breadth of Asia’s emerging and frontier equity markets, which allows us to identify and capture opportunities across the spectrum from China on one end all the way over to smaller frontier markets such as Sri Lanka on the other. In the near term, it appears that both domestic and external demand will remain steady at the regional level, with promising signs of a nascent recovery in China. While we may see some heightened volatility in the year ahead, as ever, we remain mindful that this can present good buying opportunities.
More than anything, we fully expect that the underlying trends we see at play in the region will carry on into the longer term. As such, our optimistic long-term view for Asian equities is not so dependent on what happens to factors such as short-term interest rates or the ups and downs of daily oil price movements. It relies on our ability to identify and invest in companies that we believe possess attributes to outperform an already strong growth outlook for Asia. We find that if can invest in strong companies geared toward key factors such as rising domestic demand, the up-and-coming middle classes and companies with long-term competitive advantages, it will serve us well into the longer term. We have been doing this as Asian equity investors for many years and will continue to do so in 2017.