20 September 2019
Economic indicators have hinted at a revival in capital expenditure and consumer spending in Asia.  Photo: fashionnetwork
Economic indicators have hinted at a revival in capital expenditure and consumer spending in Asia. Photo: fashionnetwork

Capturing Asia’s growth is a long-term endeavor

Asian equities are set for a banner year, with the longest stretch of quarterly gains since 2013 driven by synchronized global growth and robust corporate earnings. As such, many investors are now questioning whether this stellar run can continue – and if Wall Street sneezes, will Asia catch cold?

The key driver underpinning performance this year has been a recovery in corporate profits, and after the recent earnings season, analysts remain upbeat on the region. Economic indicators have hinted at a revival in capital expenditure (spending by companies to upgrade physical assets such as machinery and buildings) and consumer spending in Asia. We expect earnings growth to spill over from the technology and commodity sectors into the financial and consumer spaces as recovery in domestic demand takes hold.

However, we do expect the next leg of the rally to be somewhat slower, as opposed to the “fast and furious” run-up seen this year. This is pretty much in line with market expectations, where the 2018 consensus earnings growth estimate for MSCI Asia ex-Japan is currently running at a more sustainable rate of 10 percent compared with 22 percent for 2017.

Correction cannot be ruled out

While fundamentals remain positive, we cannot rule out a market correction. US equities have outperformed international markets by almost 100 percent since the global financial crisis. While US President Donald Trump recently revealed an ambitious plan to cut corporate and personal taxes, he still needs congressional approval and there has been little progress on other market-sensitive areas, such as healthcare reform and infrastructure spending. Meanwhile, tensions between the United States and North Korea are at their worst since the 1950-53 Korean War.

But timing the market is incredibly difficult – even for professional investors – and emotions can often dominate rational decision-making. That’s why we prefer to stick to the fundamentals and on a relative basis, Asia remains attractive. While global economies are connected by a variety of channels such as trade and capital flows, intra-regional supply chains and foreign direct investment are stronger within Asia than even before – offering a bigger element of insulation from international volatility.

Seek sustainable opportunities

Any short-term pullback could provide an excellent buying opportunity for those investors who are committed to Asia’s growth story and who have longer-term investment horizons. Strategies that seek long-term capital growth by investing in quality Asian stocks – companies that can continue to produce strong returns based on a sustainable competitive advantage and good corporate governance – should appeal.

Fortunately, Asia has no shortage of these stocks, whether they’re innovative internet companies or insurance companies providing cover for a growing middle class in China, or technology and semiconductor firms in Taiwan and South Korea – there are a wealth of attractive investment opportunities to choose from. But it takes a professional investment manager with strong on-the-ground research capabilities to spot the diamonds in the rough.

Taking the stabilizers off

Finally – markets are preparing for the Federal Reserve to begin reducing its US$4.5 trillion balance sheet this month – and there are those who fear that the removal of this long-running monetary support could send markets into a tailspin. While investors should keep an eye out for unforeseen consequences, they should remember that the central bank has always been careful not to tighten too early and threaten recovery. In this sense, it is just like a parent who doesn’t want to remove the stabilizers from their child’s bike until they can pedal forward unaided. That time is here.

– Contact us at [email protected]


Managing Director, Chief Market Strategist, Asia, J.P. Morgan Asset Management