Equities are having a strong year, driven by synchronized global growth and improved corporate earnings – and Asia has been in the fast lane, benefiting from both top-down and bottom-up tailwinds.
On the macro-economic front, there has been continuous improvement in purchasing managers’ indices across the world and Asian export data has turned more positive. Meanwhile, in terms of growth, India, China and the ASEAN currently top the International Monetary Fund’s league table with forecast growth of 7.2 percent, 6.2 percent and 5.1 percent respectively for 2017.
And if we look under the hood, we’ve continued to see earnings upgrades for Asian companies with strong quarterly results from selected sectors such as technology, which have been driven by attractive demand/supply dynamics in memory chips, semi-production equipment and silicon wafers.
Broad investor sentiment has also been buoyed by a series of favorable political and market developments. In South Korea, the landslide election victory of President Moon Jae-in and robust export data have supported the country’s equities.
Meanwhile, China equities have rallied amid a more stable renminbi outlook, an expected focus on stability ahead of the 19th Communist Party plenum this fall and a favorable reaction to MSCI’s decision to partially include China A shares in its emerging market and world stock indices. The decision has been widely seen as a pat on the back for China’s continued efforts to liberalize its capital markets and is expected to spur greater research coverage and ultimately foreign investor asset flows.
The clouds need to be watched, though, in case a sudden rain shower makes the going more slippery. US President Donald Trump’s promises of tax reform, deregulation and infrastructure spending sent US stocks to new highs following his November 2016 election and failure to push this agenda forward could hit sentiment.
Meanwhile, China’s delicate balancing act between supporting growth and tackling financial reform will also be tracked closely.
If we take a step back from the day-to-day news flow, we can see that Asia’s strong performance is being powered by a very strong engine. Going into 2017 there were fears that newly-elected US President Trump would spark trade wars by pursuing protectionist policies. But those fears have faded as the region has benefited from a synchronized upswing in global growth, resulting in a raft of positive data prints across the region.
Taiwan’s trade surplus has hit a record high, Vietnam’s exports have surged, Japan’s overseas shipments have expanded for seven straight quarters, South Korea’s shipments jumped 20 percent in July and China’s exports in yuan terms climbed 15 percent in the first half from the same period a year ago.
Against this backdrop, there are hopes for a virtuous circle whereby export growth brings about higher capital expenditures and greater income growth.
And it’s not just the usual suspects that have done well when it comes to export growth. Machinery, transport and commodity-related capital goods exports have made strong contributions in addition to commodities and electronic components.
And in terms of the sources of demand growth, China and the broader ASEAN region continue to play an increasingly stronger role – as they have done since the global financial crisis. This is due to two broad developments.
Winds of change
Firstly, Asian consumers (especially from China, India and Indonesia) have climbed the consumption curve in recent years, moving from spending on the daily necessities to discretionary expenditure on higher-ticket items amid rising affluence. For example, China represented just under one third of global demand for smartphones in 2016, and the rest of Asia made up another 20 percent.
Secondly, in recent years we’ve seen the migration of some labor-intensive manufacturing processes to frontier economies in Southeast Asia such as Vietnam and Cambodia, reinforcing the network of intra-regional trade.
More broadly, since China’s entry to the World Trade Organization in 2001 the country has become the point of assembly for many manufacturing products and consumer goods, by collating components from around the region. As such, Asian exports to China are not simply to meet domestic demand there but are also shipped onwards to other markets such as the US and Europe – enhancing the overall export outlook.
The road ahead
Asian equities have already done well year-to-date, meaning a fair amount of the positive story above has already been reflected in market prices. However, Asian fundamentals remain positive and the US dollar’s drift lower should continue to encourage flows into non-US risk assets.
Looking ahead, upside surprises to global growth will be harder to come by and the increases in Asian export growth and commodity prices are likely to moderate. However, we expect overall growth in 2017 to remain above average, and while volatility and the potential for a slowdown in China’s economy need watching in the second half, Asian equities should continue to do well on a relative basis.
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