Asian Market Outlook

By: AGF Asset Management Asia Ltd.¹ • March 23, 2018 • Products

Regional Outlook

Despite the strong performance over the past three quarters, valuations remain reasonable in Asian markets. Based on consensus numbers, the region is trading at about 13.2 times 2018 earnings with an expected earnings growth rate of 12.1%. On a trailing P/B basis, valuations have re-rated back to long-term historical averages. Compared to global markets, Asian equity valuations also appear attractive. The MSCI World is trading at 2.4 times trailing P/B.

Figure 1. MSCI Asia ex-Japan Trailing Price-to-Book

Source: Bloomberg as at November 3, 2017

Figure 2. MSCI China Trailing Price-to-Book

Source: Bloomberg as at November 3, 2017

The macro-economic outlook for Asia looks favourable with fairly robust growth and benign inflation. A weak U.S. dollar also mitigates the risk of capital outflows from the region. Having said that, a 4% appreciation of the trade-weighted dollar from recent lows in early September was accompanied by further gains in Asian markets. Corporate earnings growth has also been strong, with the region recording 17 consecutive months of upgrades to 2018 consensus earnings-per-share estimates. This positive backdrop, coupled with abundant liquidity, bodes well for a continued rise in Asian equities.

Figure 3. GDP Growth and CPI Forecasts (%)

Source: Consensus forecasts from Bloomberg as at November 9, 2017.
Note: Asia includes China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, and Vietnam.
* India's fiscal year runs from April-March.


The key risks to this positive outlook include a sharp rise in U.S. interest rates, a policy change to quickly deleverage the Chinese economy and an outright war with North Korea.

In China, the recent 19th Party Congress revealed no major surprises. However, there is clear indication that President Xi, who was appointed for a second term, has further consolidated his power base. The new Politburo Standing Committee, the party’s most powerful body, does not appear to have a clear potential successor to President Xi, leading to speculation that he may seek to remain in power after his second 5-year term ends in 2022. His stature and authority within the party was clearly elevated when his thought on “Socialism with Chinese characteristics for a new era” was added to the party’s constitution. We are likely to see a continuation of his present economic policies. There was no mention of growth targets, but instead a focus on quality of growth rather than speed. His key priorities including the anti-corruption campaign, supply-side reforms, gradual restructuring of state-owned enterprises, environmental protection, anti-speculation measures for housing and the one-belt-one-road (OBOR) policy are likely to continue. We see a slight slowdown in growth in 2018 as we anticipate a modest pace of economic restructuring and as the housing market cools.

In South Korea and Taiwan, a rebound in exports since the second half of 2016 has helped stabilize growth in both economies. For South Korea, while tensions with North Korea continue to pose concerns, the reaching of an agreement with China to normalize bilateral relations should boost the economy by lifting companies in sectors with exposure to China, such as tourism and cosmetics. On the other hand, Chinese President Xi had a stern message for Taiwan at the 19th Party Congress, noting that China has the “resolve, confidence and ability” to defeat Taiwan independence. Domestically, the Tsai administration is pressing ahead with pension reforms and a major infrastructure development plan, which should be positive for the economy in the longer run.

In India, the worst of disruptions from the implementation of the Goods and Services Tax (GST) on July 1, 2017 may have passed, with a number of high-frequency macro indicators such as tractor sales and diesel demand rebounding strongly in September. Prime Minister Modi continues to push ahead with reforms and ambitious development plans, recently unveiling a INR2.1trillion (US$32.3 billion) bank recapitalization plan and a INR6.9 trillion (US$106.3 billion) mega road building plan. Execution will be key.

South East Asian countries have generally benefited from a cyclical recovery in commodity and oil prices over the past few months, resulting in better trade figures. On the fiscal front, governments also appear to remain committed to infrastructure spending, as evidenced by a larger allocation of their annual budgets to these projects. In Indonesia, GDP growth, which has been disappointingly flat at around 5%, appears set to accelerate in 2018, supported by recent interest rate cuts and increased government spending.

Figure 4. Change in policy rates through the current economic cycle

Source: Bloomberg, November 8, 2017.

* Bank Indonesia changed its policy rate from the BI rate to the 7-day reverse repo rate in Aug 2016. For this rate cycle, the BI rate had been cut by 1.25% from 7.75% in Feb 2015. The new policy rate was cut four times by a total of 1.0%, in Sep and Oct 2016 as well as Aug and Sep 2017, to the current 4.25%.

China Outlook

China’s GDP growth remained buoyant and grew at 6.8% year-over-year in the third quarter of 2017. Manufacturing activities continued to advance with the official manufacturing PMI remaining above 51 levels throughout the period. Meanwhile, domestic consumption was also resilient with the non-manufacturing PMI above 54 levels. Partly helped by the wealth effect from the strong property market, the Consumer Confidence Index in China reached 113.3 in June, the highest level since August 2007. Benefiting from a weaker currency in 2016 and an improvement in external demand, Chinese exports were up 7.6% for the first eight months of the year, a significant improvement over the 7.7% decline over the same period in 2016.

Figure 5. Household expenditure growth in China

Source: Deutsche Bank, WIND, October 2017

On the outlook, a long-lasting consumption upgrade trend in China, driven by high employment rates and steady income growth, is likely to lift up the quality of growth and benefit leading companies in a number of sectors including consumer staples, tourism, automobiles, home appliances and technology. Household spending on services, particularly health and education, has also been growing much faster than others. A rise in exports, while modest, looks sustainable due to a synchronized global recovery and should continue to contribute positively to GDP growth. Although ongoing supply-side reforms including industrial capacity cuts and tough environmental control rules may limit the upside of investment-led growth, it should sustain the rebound in corporate earnings for longer. The key uncertainty to watch closely is the property construction and investment slowdown due to lower contribution from shanty-town subsidies and potentially slower property sales as a result of the re-instatement of tighter policies on the sector of late.
It is worth highlighting that the benign inflationary environment is likely to continue into 2018. Headline inflation has remained below 2% throughout most of 2017 thus far mainly due to deflationary food prices. The government’s corn reserves are at a high level and the destocking cycle which has just begun has some room to run. This will continue to keep inflation low, as food inflation in China is highly correlated to the price of corn, which is a major feedstock for livestock in China.

Figure 6. Inventory of Chinese corn stocks (tons)

Source: Bloomberg, as of November 7, 2017

1 This firm acts solely as a Portfolio Advisor to the Fund. A portfolio advisor provides the Fund with investment research and recommendations. The firm does not make the investment decisions on behalf of the Fund.

The commentaries contained herein are provided as a general source of information based on information available as of November 10, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein.

The information contained in this commentary is designed to provide you with general information related to investment alternatives and strategies and is not intended to be comprehensive investment advice applicable to the circumstances of the individual. We strongly recommend you consult with a financial advisor prior to making any investment decisions. References to specific securities are presented to illustrate the application of our investment philosophy only and are not to be considered recommendations by AGF Investments. The specific securities identified and described herein do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.