Andrew Gillan, Head of Asia ex Japan equities and Co-Manager of the Asian Growth Strategy, shares his expectations for the performance of Asian equities over the remainder of the year.
What have been the drivers of recent Asian equity market performance?
After sustained underperformance relative to developed markets for a number of years, Asian equity markets stabilised in 2016 and then delivered very strong performance in 2017. This was driven by significant corporate earnings upgrades and according to Bloomberg data a return to around 20% earnings growth after several years of lacklustre results. Initially, the technology sector led this trend, principally by memory chip manufacturers in hardware and Chinese internet companies in software. However, this earnings recovery has subsequently broadened out to cyclical companies, which are more sensitive to changes in the economic cycle, while financials have also seen a healthy growth in earnings expectations. More recently, share prices have moved sharply given concerns about potential trade wars, but investor sentiment remains positive towards Asian equities.
What are your expectations for the remainder of 2018?
We remain positive on the prospects for Asian equities given the healthy earnings growth expectations and the current discount to developed market equities. While higher US interest rates and very recent US dollar strength may encourage some investment flows away from Asia, we have not seen this so far and believe that the structural case for investing in Asia remains intact. The region’s economies are in stronger shape and growth forecasts both at the macroeconomic and corporate level should continue to attract investor capital.
How are your portfolios positioned given this backdrop?
From a political and economic perspective, we are incrementally more positive on China compared to a couple of years ago. China’s President Xi has strengthened his position and continues his reform agenda and market liberalisation. While there remain significant hurdles to overcome, not least the levels of debt in the economy, Xi is making progress and the recent outperformance of Chinese equities reflects this. China’s equity market is likely to remain volatile but we see many opportunities there and the opening up of the mainland-listed ‘A’ share markets to foreign investors adds to the investible universe.
If we look at the Asia Pacific ex Japan region as a whole, our strategy took an overweight position in information technology and an underweight to financials in 2017. We have retained this positioning into 2018, but have reduced the magnitude by lowering the weighting to technology, notably in the smartphone supply chain, while adding to financials, predominantly in Southeast Asia where we see value and improving fundamentals.