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.
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.
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.
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.