Mike Kerley, Co-Manager of the Janus Henderson Asian Dividend Income Strategy along with Sat Duhra, provides the team’s outlook for 2018. The managers believe economic as well as corporate earnings growth should spur continued strength in Asian equities but are ever mindful of the risks; Mike also discusses how the team is positioned moving towards the new year.
What lessons have you learned from 2017?
2017 was a strange year; we had the election of President Trump at the end of 2016, and markets reacted to what we thought was going to be a reflation growth trade. That didn’t quite materialise, but growth has really been to the fore through 2017 despite the fact that we’ve had geopolitical issues with North Korea, political issues both in the UK and across Europe, interest rates rising, potentially, and maybe QE easing off, if not in the US, then the EU and Japan.
The trade that’s really worked this year has been growth; growth in new economy sectors, especially technology. Chinese internet names have been to the fore, as well as other tech names, like Samsung and TSMC, and generally growth has got pretty expensive, quality growth even more so. For an income investor, it’s been a little tough; dividend yield hasn’t been that popular, especially with rates rising, or potential for rates to rise, so it’s been difficult to hold onto the index in general.
What has been a positive has been earnings; earnings growth in Asia has been a very strong sign. Unlike in previous years, where we’ve seen earnings generally being downgraded through most of the year, 2017 was different; we’ve seen continuous upgrades, now to the point where earnings expectations are for growth of 21% in 2017, which is a big number. And that has helped, I think, Asia outperform the rest of the world.*
What are the key themes likely to shape the markets in which you invest in 2018?
Well, I think growth will continue to be very important; the Asian growth cycle is definitely favourable at this point, being led by China. The Communist Party Conference, which we’ve just seen in China, I think, just means more of the same, so we’ll see reform focus on fixed asset investment consumption, and the build out of some of the major projects, like the ‘One Belt, One Road’. So that will be a major driver, both for China itself, and the region as a whole.
We expect earnings to be fairly positive; the expectation for 2018 at this point is 11% earnings growth*; that, to my mind, seems quite fair. We won’t expect some of the big bounces we saw in areas like materials off a low base, but the tech cycle is generally favourable.
And for income, well income still remains a very attractive story; companies are generating a lot of cash flow, dividend payouts are relatively low, so we would hope that dividends would at least match, and maybe even exceed, earnings in 2018.
Where do you currently see the most compelling opportunities within your asset class?
Some of the key themes we’re playing through the portfolio this year and into 2018− we still like technology, not so much the internet side, but more the hardware, ie the facilitators of the internet boom, companies like Samsung Electronics, TSMC, Quanta, they appear in our portfolio.
Consumer stocks as well, more discretionary than staple, but Dali Foods, and Anta Sports in China, are good examples of the kinds of companies we own. And also, oil refineries; this is an area we’ve been in through most of this year, and it has done well for us, but we expect refining margins to remain pretty well-supported through 2018, irrespective, almost, of where the oil price goes.
Our preference is for North Asia over South Asia, partly because we think that there are cheaper companies there, better valuations, whereas ASEAN looks quite expensive. And the earnings trend favours the north over the south; at this point we’re pretty negative on India, where we think the earnings trends are pretty negative, and the market is trading at probably its most expensive level for some time.
One Belt One Road: a diplomatic and trade initiative proposed by China in 2013, it is estimated around $5tn will be spent on infrastructure across more than 60 countries in Asia, the Middle East, Europe, and Africa.
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