Fund managers series

Asian equities are still a good bet amid volatility

Mr Crabb expects continued volatility in the market, but he says stocks and shares in the region remain under-owned among investors, and valuations still offer significant upside. Asia could break out of a six-year downward trading range compared wit
Mr Crabb expects continued volatility in the market, but he says stocks and shares in the region remain under-owned among investors, and valuations still offer significant upside. Asia could break out of a six-year downward trading range compared with developed markets.PHOTO: GIN TAY FOR THE STRAITS TIMES

Joshua Crabb, head of Asian equities at Old Mutual Global Investors, shares his views on Asian equities in the latest in our series featuring fund managers and leading market experts.

With Mr Donald Trump as President of the world's largest economy, markets are bracing themselves for a roller-coaster ride.

Mr Crabb, who is based in Hong Kong, expects continued volatility in the market, but says that Asian equities are still a good bet, despite Mr Trump's protectionist rhetoric on trade, particularly against China.

"Asian equities remain under-owned among investors and valuations still offer significant upside, especially compared with expensive developed markets' equities," he said.

Mr Crabb manages the Old Mutual Asian Equity Income Fund and Old Mutual Pacific Equity Fund, both of which are registered for institutional investors in Singapore.

The Old Mutual Asian Equity Income Fund generated a year to date return of 10.4 per cent, as at Nov 30 last year. The Old Mutual Pacific Equity Fund generated the same result over the same period.

MARKETS REMAIN OPTIMISTIC

Much talk has centred on Mr Trump's views on protectionism, especially in relation to the Asian economies. But as is so often the case with public figures, we don't think the full-scale, aggressive increases in import tariffs that Mr Trump promised during his campaign will come to fruition. We believe the real focus will be on making trade deals.

MR JOSHUA CRABB, on the Donald Trump effect on Asian equities.

Q How are Asian equity markets doing since the election of Donald Trump?

A Mr Trump's push for tax cuts and his plans for fiscal expansion are pro-growth and his victory has generally been positive for global equity markets and commodity prices. Economic strength and inflationary pressure seems to be spreading outside the United States now.

In terms of reaction, cyclical sectors, which are sectors that react according to the strength of the economy, rally reasonably strongly with a rotation out of quality, defensive sectors.

However, export-oriented equity markets and sectors have come under pressure due to the threat of Mr Trump's protectionist stance, with currencies taking much of the strain.

The sell-off in the US Treasury market means much steeper yield curves which hurt currencies - but is largely good news for financials, including Asian banks.

Q As a veteran fund manager, how would you characterise 2016 for Asian equity markets ?

A January/February was one of the worst starts to a year on record for Asian equity markets and negative sentiment intensified with further yuan devaluation and concerns over Chinese capital outflows.

There was later a strong V-shaped recovery with Asian central banks becoming more accommodating and governments launching fiscal stimulus policies, notably in China.

Asian markets have recovered strongly and analysts' earnings downgrades of the last few years are starting to be replaced by upgrades.

Asia is now attempting to break out of a six-year downward trend - this is very significant.

Q How does the Donald Trump effect on Asian equities compare with the Brexit effect?

A Much talk has centred on Trump's views on protectionism, especially in relation to the Asian economies. But as is so often the case with public figures, we don't think the full-scale, aggressive increases in import tariffs that Mr Trump promised during his campaign will come to fruition. We believe the real focus will be on making trade deals.

Let's not forget the domestic economies of Asia are in much better shape than they were even 10 years ago.

Although the exported-orientated economies of Asia, such as Taiwan and South Korea, may see some weakness in GDP growth, appetite for increased trade barriers among members of Congress is severely limited.

The potential for Mr Trump's protectionism to hurt Asia is certainly palpable.

Markets have reacted in a similar fashion to both Brexit and the election of Mr Trump with an initial sell-off and flight to safety followed by a subsequent bounce as the markets digested, understood and ultimately became more comfortable with potential ramifications.

That said, the speed of the rally after Mr Trump's win has certainly surprised us.

Q What areas and sectors do you favour in Asia and why?

A Indonesia is moving in the right direction, notably on infrastructure reforms and development. The recent successful tax amnesty has further consolidated President Joko Widodo's political control and we expect an acceleration of the overall reform agenda. We believe Indonesia is on the verge of a cyclical upturn.

In particular, we like sectors such as real estate development, energy such as coal, and materials such as steel.

We are also overweight on India as Prime Minister Narendra Modi's landmark macroeconomic reforms aimed at putting India's economy on a long-term growth path are firmly in place. While there may be some short-term pain, the foundation for solid long-term corporate earnings growth is there.

Fiscal discipline is paving the way for low inflation and more rate cuts and the new bankruptcy law and cleaning up of bad debts should help drive credit growth over time.

Additionally, rising interstate competition augurs well for long-term growth and at the same time several anti-corruption measures should increase investor comfort. In India, we like infrastructure-related sectors such as cement, materials sectors such as steel, as well as the public sector banks.

Sectors such as consumer, IT and pharmaceutical look expensive to us.

Q How does next year look for Asian equities? What is the biggest risk to the upside?

A We expect Asian equity markets to generally move higher from current levels. We believe they remain under-owned and cheap.

Meanwhile, earnings revisions are stable and improving, with a positive growth of 7 per cent forecast for 2017.

The global market rotation towards value and away from growth also applies in Asia. As such, we are positioned for a cyclical upturn with a strong tilt towards value stocks in the Asian portfolios we run.

Although we predict continued volatility, a number of key market trends are changing and we believe it is a good time now to invest into Asian equities.

Asia could break out of a six-year downward trading range compared with developed markets and if this holds, this could very well be the "buy the dip" moment for the region.

A version of this article appeared in the print edition of The Sunday Times on February 19, 2017, with the headline 'Asian equities are still a good bet amid volatility'. Print Edition | Subscribe