Three primary concerns are on Asia investors’ minds as they enter the third quarter.
Increasingly negative emerging markets (EM) sentiment, continued trade jitters, and volatility in China onshore equities, according to JP Morgan Asset Management.
The fund house noted in its quarterly outlook that EMs are down but not out, because the asset class is probably more resilient than global investors are currently crediting.
If you look at the current EM sell-off, it is largely attributable to external influences, such as rising US interest rates, a stronger US dollar and protectionism threatening trade growth, said Tai Hui, chief market strategist for Asia Pacific.
The domestic fundamentals, however, remain strong and have demonstrated more resilience than during the 2013 taper tantrum, he added.
JP Morgan continues to be constructive on EM assets, particular EM equities for it’s by positive growth differentials and earnings growth. ‘EM fixed income will continue to see greater pressure from rising rates,’ Hui warned.
Chinese volatility seems to be the buzzword right now among Asia investors. Although the US-China trade war has contributed to the ‘nervous’ environment to a great extent, that's not the only cause for the uncertain market sentiment.
Global market strategist Chaoping Zhu said weeks before Trump’s latest trade announcement, the Chinese market was already weakening.
He said special treatment and expedited listing of several unicorns and an initiative to facilitate the return of overseas listed tech companies triggered the market’s concern. What’s more, several mega IPOs have recently caused tight liquidity in the market.
Nevertheless, JP Morgan expects China’s economic outlook to remain stable, with GDP growth at least meeting the government’s 6.5% target. As such, the China equities market fundamentals are still solid.
‘Chinese equity valuations have declined to a two year low, providing an attractive entry point for long-term investors. In addition, corporate earnings are growing steadily, especially of among the blue-chip sector leaders,’ Zhu added.
JP Morgan still sees trade threats as tactics to pressure all parties to negotiation, especially ahead of the US Congressional mid-term elections in early November.
Ongoing tension is already pushing investors to adopt a more cautious position, as shown by falling bond yields and weak stock performance in recent weeks, Hui said.
'This reinforces our long-held view of maintaining a diversified portfolio, mixing equities with fixed income, to manage volatility and risks.
‘In equities, we see opportunities in sectors that are less exposed to global trade, and benefiting from rising demand from local consumers. The recent corrections have also made valuations more attractive, while the earnings outlook has remained stable,' he added.
‘This bodes well for equities in China and Asian markets with a large consumer base, such as Southeast Asia and India.'