Asian equities: turnaround drivers

11/03/2019

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Andrew Gillan, Head of Asia ex-Japan Equities at Janus Henderson Investors, discusses the reasons behind the recent rally in Asia ex-Japan equity markets and the opportunities the region may hold for the long-term investor.

What a difference a few months make! Asia ex-Japan equities have risen approximately 10% in US dollar terms in the first ten weeks of 20191, in stark contrast to the sharp sell-off in the fourth quarter and general market weakness last year as a whole.

So what has changed? Expectations about the pace of US interest rate rises have shifted considerably, with the market now expecting a much more measured increase – if indeed there are any further hikes in rates. This means that the US dollar strength that we saw in 2018 is unlikely to repeat itself and puts emerging market assets back in focus. The second, more Asia-specific shift, has been a softening in the US stance towards the implementation of trade tariffs against China. Although no resolution has been reached, a deal of some kind seems much more likely, given the impact that the tariffs have already had on global growth and investment.

Hong Kong street scene

The China effect

Rather surprisingly, the fundamentals within the region are little changed and, if anything, both macroeconomic data and corporate earnings have weakened in early 2019. But the region has benefited from positive flows and a recovery in the mainland China A share market, which has even ventured into bull market territory following last year’s bear market.

The Chinese economy continues to slow and guidance at the recent National People’s Congress targeted a still healthy band of 6-6.5% gross domestic product (GDP) growth, down from last year’s 6.5%. Clearly, the Chinese government’s deleveraging campaign has impacted economic output and as a result we have started to see a reversal in policies to support growth. These actions, however, have remained targeted and seemingly more disciplined than in the past, which implies that the government wants to reduce the reliance on debt-fuelled growth.

Consumer focus

Within the Janus Henderson Asian Growth strategy, we have continued to reduce exposure to the technology sector, although remaining overweight, and have re-allocated towards some consumer businesses. We have retained an overweight position in Taiwan and India, and underweights in China and Australia. Importantly in China, we have a significant allocation to A shares, which have rebounded very strongly so far this year, and this has helped compensate for our underweight in China as a whole.

India, overall, has lagged the region in anticipation of a closely fought election in April, which has led to foreign outflows. We are happy to maintain an overweight position to India because the market still provides attractive long-term growth prospects and offers a number of good-quality companies that are generating superior and consistent returns on equity relative to the region. Our favoured positions are a mixture of domestically-focused private sector financials and consumer businesses, as well as IT services companies with businesses largely located outside of India.

Long-term opportunity

Given the strong start to the year, it is very reasonable to expect more volatility ahead, stemming from events external to the region as well as within, including the China/US trade talks and a number of domestic elections. While we remain positive on the outlook for the region, given the relative valuation of Asia against developed markets, we do not expect the recent market strength to continue in the short term without support from corporate earnings or stronger economic data. Any correction would offer the long-term investor a good opportunity to gain exposure to one of the world’s fastest growing regions.

1 Source: Bloomberg, in US dollar terms, as at 8 March, 2019.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Please read the following important information regarding funds related to this article.

Janus Henderson Asia Pacific Capital Growth Fund

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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Janus Henderson Horizon Asian Growth Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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