INDUSTRY VOICE: Income investors overlook Asia ex-Japan at their peril. Strong revenues indicate rising dividends should be a long-term structural trend.
With China back in the economic front seat, corporate revenues have rebounded across the Asian region. Half year earnings increased by about 12%-13%, despite the headwinds caused by the trade tantrums between China and the US and local currencies being marked down as the U.S. Federal Reserve continues to tighten monetary policy.
On the ground, companies are delivering earnings growth. At current valuations, we believe there is a great opportunity to invest.
Asia's growing companies look attractive on a historic basis and against their peers in Europe and the US. After three years of declines, the earnings cycle hit bottom in 2016. The return to form has been impressive, with momentum carried into this year. But corporate growth, however, is not uniform across the region. That offers good opportunities for active investment strategies to add value.
Revenue growth in the Korean main index has already started to slow as heavily weighted large cap names are struggling. Even within China, where the MSCI China index recorded 24% earnings growth last year, there is plenty of room to distinguish between those companies that can continue to grow irrespective of economic conditions.
Even where growth is more assured, investors should prepare for volatility in stock prices. External pressures, particularly from the US, are unlikely to ease in the short to medium term. While the People's Bank of China (PBOC) monetary policy has been more accommodating, the Chinese government has not taken any bold fiscal policy initiatives, such as corporate tax cuts, to cushion the impact of external headwinds.
Whatever happens, we believe Asian stocks are far better placed than they were during the Asian financial crisis. Emerging Asian economies have cut their external debt levels. And independent central banks are raising rates already to stem potentially aggressive capital outflows.
The Chinese economy itself rebounded last year as government policymakers focused on deleveraging the financial system without causing business too much harm. Access to credit has declined, but not too painfully. Investors should be looking beyond the next few months and establishing positions for the bigger structural changes ahead.
China's growth strategy is moving away from exports and investments toward consumption. Domestic firms with low levels of borrowing should benefit the most in our view.
With the current global background in mind, a shift from cyclical, high-growth stocks to more defensive and cash flow-driven businesses makes sense. Consumer staples and telecom stocks may not be overly exciting when compared with the high growth tech juggernauts, but they generate a lot of money on a regular basis.
We also see more opportunities across the region in consumer-related businesses in industries as varied as retail, consumer staples and goods, consumer discretionary, autos, media, leisure, entertainment, tourism, insurance and wealth management.
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