What happens next for Asian equities after a 'tough year'?
Asian stockmarkets have had a tough year, culminating in October as trade tensions, a strong US dollar, rising bond yields and weaker Chinese macro data combined to send share prices sharply lower.
While market sentiment has been undoubtedly weak, it is worth taking a step back to see where we stand.
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On the face of it, Asia has given up all the valuation re-rating that it achieved since the end of 2015. Following the price declines, the index now trades on a price/earnings multiple of 11.9x 2018 estimated earnings and 11.1x 2019 earnings - a level around one standard deviation below the ten-year average.
However, in the period 2010-2015, Asian earnings contracted by 0.5% per annum on average. In contrast, profits since 2015 have grown at 10.1% on an annualised basis. Earnings forecasts for this year have moved lower, but the region is still expected to grow earnings by 8.4%. The low valuation does not reflect the much improved picture; negative sentiment has overridden the fundamentals.
Chinese GDP growth has slowed, reaching 6.5% in the third quarter. The politburo acknowledges ‘downward pressure' on the economy and is aiming to ease both fiscal and monetary policy while avoiding undoing the past two years' work on deleveraging. With such a macroeconomic backdrop, however, it is easy to forget the long-term structural growth opportunities.
While many talk about the rise of the Chinese consumer, few discuss the underlying trends that support higher incomes and in turn greater consumption. The shift in China's manufacturing base towards higher value-added goods is one example.
Chinese production is shifting away from textiles and plastics, towards computers, consumer electronics and industrial machinery. And this brings us back to trade, as it is this fundamental shift that has caught America's attention and the ire of President Donald Trump.
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Rhetoric from both sides has been running high recently, but we expect trade tensions to be resolved by negotiation - after all, the two economies are more intertwined than ever. While resolution may not currently appear close, we have seen the market bounce strongly at the suggestion of a rapprochement. If the current uncertainty dissipates, markets won't hang around at these valuations for long
Mark Hammonds is manager of the Guinness Asian Equity Income fund
Bull Points
- Asia Pacific valuations at 2015 lows while the earnings picture is much improved
- Resolution of trade tensions could bring a rapid re-rating for the region
Bear Points
- Moderating economic growth in China
- Anti-Chinese sentiment unifies otherwise polarised US politics
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