Asia still an engine for global growth, says asset manager

Contrary to market expectations, Amundi Asset Management does not expect a hard landing in China. While yuan risk, capital outflows and high levels of gearing are still of concern to investors and can impact Asian and global growth, they have somewha
Contrary to market expectations, Amundi Asset Management does not expect a hard landing in China. While yuan risk, capital outflows and high levels of gearing are still of concern to investors and can impact Asian and global growth, they have somewhat subsided over the recent quarters. PHOTO: BLOOMBERG

Slowing trade may hurt firms in traditional growth areas but region will remain key driver

In a world where growth remains at subdued levels and some markets are even experiencing no growth or contractions, Asia remains one of the main drivers for global economic expansion.

The years of slowdown after the post-global financial crisis (GFC) investment spree have come to an end, and there are clear signs of the Chinese economy bottoming out.

Contrary to market expectations, we do not expect a hard landing in China despite structural problems still to be solved by the central government. While yuan risk, capital outflows and high levels of gearing in China are still of concern to investors and can impact Asian and global growth, they have somewhat subsided over the recent quarters.

We see the worldwide commodity rally continuing from last year to this year, as overcapacity reduction continues in China and elsewhere, limiting new supply to the market. Coupled with the bottoming of global infrastructure spending, that paves the way for stronger prices in the coming months. This rally will filter into equity markets, especially in energy and material names which have underperformed over the last few years.

However, Asian economies and Asian companies in traditional growth areas may be directly affected by the long-term trend of slowing global trade, which we believe will persist.

That said, we see Asia remaining a key growth driver in the world throughout this year.

FOCUS ON HIGH-QUALITY ASIAN EQUITIES

Fundamentally, earnings expectations are being revised upwards, with strong double-digit growth rates in countries such as China, South Korea, India and Indonesia.

Overall, we are positive on Asian equities, given their favourable valuation support.

While US equity indexes are at all-time highs, with valuation levels well past post-GFC highs, Asian equities are trading near the long-term historical average, even after the rally over the last year.

Fundamentally, earnings expectations are being revised upwards, with strong double-digit growth rates in countries such as China, South Korea, India and Indonesia. Valuation is reasonable, and with cyclical names relatively cheap compared with defensive names, there are many opportunities within cyclicals that can help investors capture the growth in Asian economies.

We intend to focus on owning the higher-quality stocks in the Asian region whose underlying business would be long-term winners in their respective industries. Firms with high barriers to entry, a strong balance sheet and decent corporate governance track record are more likely to perform in a scenario where the Asian and global economic outlooks remain challenging in the medium term. We continue to focus on bottom-up-generated ideas, looking for firms with sound management and a good potential to outperform.

OPPORTUNITIES AND RISKS IN ASIAN EQUITY INVESTMENT

Amid the current economic environment, what is clear is that protectionist measures will increase in the US. Thus, we are more cautious on exporters, while favouring countries and sectors that are more domestic consumption-oriented and more insulated from risks arising from developed markets such as Indian and Chinese e-commerce.

The US policy of increasing rates could also put more pressure on equity prices by further driving out outflows from the flow-sensitive region, despite the positive effects of stronger commodity prices.

In India, March was a decisive month as five states underwent elections. This was an important test for the Bharatiya Janata Party (BJP) government, serving as a gauge of approval of Prime Minister Narendra Modi's policies, especially post the demonetisation exercise. BJP won convincingly in four of the elections, and crucially gained a resounding majority in the most populous state of Uttar Pradesh (more than 200 million people), thus cementing confidence in the leadership of Mr Modi.

Beyond commodities, in terms of sectors, IT hardware names are attractive on the back of the favourable inventory cycle and the upgrades from smartphone makers; some financial names are also attractive, with rising US rates boosting returns for some companies.

POTENTIAL HEADWINDS FOR ASIAN EQUITIES POST-US ELECTIONS

The Trump administration is still a big uncertainty for Asia, especially regarding the trade policies and relationship with China. It is unclear how much of President Donald Trump's promises will become actual policies, but the coming months should allow us to better see the actual shape of US foreign policy towards Asia.

In the worst-case scenario where the trade impact on Asian economies is larger than expected, local governments may resort to infrastructure spending to support domestic economies, as we saw during the global financial crisis.

It is also important to note that the market has already priced in some of the negatives from the potential reduced exports from Asia to the US. The actual effects of Mr Trump's election will depend on negotiations, which are hard to predict, given his administration's volatility.

On the other hand, we believe the Trump presidency will be positive for the commodities space, as the US plans to boost infrastructure spending. That, combined with China's One Belt, One Road initiative and limits on production capacity in the steel, petrochemical and coal markets, due to lower investment in previous years, should support commodity prices going forward.

Against this backdrop, we remain optimistic on Asia from a fundamental and valuation point of view. The region is well positioned as a key driver of global economic growth with developments on the policy and macro front that will drive markets over the year.

A version of this article appeared in the print edition of The Sunday Times on May 21, 2017, with the headline 'Asia still an engine for global growth, says asset manager'. Print Edition | Subscribe