Asian equities shrug off Trumponomics
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For Australian investors seeking to diversify internationally, the nearest and fastest-growing region still appears to be an attractive prospect in the Year of the Rooster.
Asian stocks have enjoyed a positive start to 2017, and could be set for more gains despite rising US interest rates and the threat of geopolitical instability.
For Australian investors, taking advantage of the opportunities in the world's most economically dynamic region could prove rewarding, analysts suggest.
"The outlook for Asian equity markets is very good compared to the rest of the world," Mark Mobius, executive chairman of Templeton Emerging Markets Group, told Bloomberg News.
"Economic growth numbers projected for the region are far above that of other parts of the world, particularly Europe and the US," he says, adding that the firm was "excited" by an uptick in consumerism in Asia.
As of 10 March, the benchmark MSCI Asia Pacific Index was showing nearly a 10 per cent gain for 2017, and an even more healthy 26 per cent rise over the past year.
Among the leading national bourses have been Hong Kong stocks, up 7 per cent in 2017 and 21 per cent over the past year; India, up 8.7 per cent this year and 19 per cent over the past year; and Tokyo stocks, with the benchmark Nikkei Stock Average up 2.6 per cent year to date and 18 per cent over the past year.
By comparison, Australia's benchmark S&P/ASX 200 Index has risen by 1.9 per cent this year, with an 18 per cent increase over the past year.
With all the major Asian bourses showing gains, including China, Singapore, and Taiwan, only Thailand and South Korea have disappointed, the latter dropping by 0.2 per cent and 3 per cent this year, respectively.
Importantly for analysts though, Asian stocks still trade at a substantial discount on an earnings basis compared to European and US bourses, according to Samsung Asset Management's Alan Richardson.
Richardson sees Asian stocks benefitting from asset reflation, including the effects of US stimulus and rising commodity prices.
Japanese stocks have also risen on the back of a weaker yen and improved earnings, with Citigroup tipping earnings growth for Japanese companies of 17 per cent in 2017 compared to just 1.7 per cent last year.
In its 2017 market outlook, Nikko Asset Management (Nikko AM) said it maintained a "large overweight stance" on ex-Japan Asia.
Strong performances in Hong Kong and Australian stocks are expected to see a 9.1 per cent US dollar return through June 2017 and 16.1 per cent at year-end, helped by China's continued growth and the global reflationary effect on commodity prices.
For Japan, it reduced its overweight stance to neutral due to higher US equity returns, although it still expects Japan's benchmark Topix index of Tokyo stocks to post a total return of 6.2 per cent and 10.7 per cent in US dollar terms, respectively, through June 2017.
Nikko AM's senior portfolio manager and Asian equities specialist, Eng-Teck Tan, says the rally in commodity prices and improved performance in China and India had given Asian equities ex-Japan a strong start to 2017.
"China and India account for around 70 per cent of the Asian market [ex-Japan], while other markets like Taiwan and South Korea have China as their major trading partner, so it's difficult for Asian stocks to do well if China and India aren't performing," he says.
For China, he says President Xi Jinping's second term in office would give him the opportunity to focus on economic reforms after the anti-corruption drive of recent years.
India had also pushed through demonetisation and its economy should see improved performance.
He also pointed to the improved profitability of Asian financial stocks, which would benefit from rising interest rates.
"With these three factors of China, India, and the financial stocks all in congruence at the same time, there's a good chance Asia will outperform the world index in 2017," he says.
Sector winners and losers
Along with financials, Tan pointed to the healthcare sector, which only accounts for around 2 per cent of the Asian index compared to 12 per cent globally, and should benefit from an increased shift towards private operators.
"In India, Indonesia, and China, less than 6 per cent of hospital beds are in private hands. But now there's a shift towards a parallel public-private system like Australia's, and investors in the early stage of this development can benefit," he says.
China's structural growth sectors, such as consumer, healthcare and technology stocks are another key focus for the fund manager.
However, Tan expressed caution on cyclical stocks, such as materials: "The market has run ahead of itself in that sector, primarily because of expectations China would cut capacity quite significantly."
Asian markets still face headwinds in 2017, including the threat of rising protectionism, the risk of a US-China trade war, and the prospect of rising US interest rates.
Yet for Australian investors seeking to diversify internationally, the nearest and fastest-growing region still appears to be an attractive prospect in the Year of the Rooster.
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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.
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