After experiencing near-zero growth since 2011, Asia’s earnings are likely to witness a moderate turnaround by the end of this year, according to JP Morgan’s Mark Davids.
The co-manager of the JP Morgan Asia Pacific Strategic Equity fund, which he runs alongside Geoff Hoare, told Citywire Asia he was optimistic global growth and Asian trade data would improve by the end of this year, providing the necessary impetus for Asian earnings to grow.
The current expectation is that Asian earnings will grow by 8% this year.
‘Anaemic trade has been an area of concern,’ he said. ‘There have been some false dawns, but overall, export growth has struggled to move above 5%, except for certain areas like Taiwanese technology.’
However, with China picking up growth momentum again, Asian exports are likely grow in a more meaningful way, he added.
China’s economy grew 7.5% in Q2, a slight improvement from Q1's 7.4%, on the back of pro-growth policies announced by the government.
He warned that until global growth ‘achieves a higher plane, and that will require China’s GDP to stabilise, it’s hard to see how Asian earnings can increase by more than 15% annually.’
Tilting away from ASEAN
Davids has made a some changes to his portfolio to favours North Asia and India over ASEAN equities. The fund is currently overweight Taiwan, China and India, he said, as they offer strong momentum stocks at attractive valuations.
In the past quarter, the fund has been switching from Hong Kong to China.
‘We have also been adding to India,’ he said. ‘Some of our major bets include technology plays in Taiwan, utilities and auto plays in China and banking names in India.'
Geographically, the fund had 19.7% of its investments in Chinese stocks, 15.4% in Taiwanese stocks and 9.2% in Indian equities at the end of June.
He’s also optimistic about Japanese equities, believing they remain attractively valued and that there is opportunity for a further re-rating.
The fund, however, does not invest in Japan, although Davids co-manages a Japan-focused fund -- JP Morgan’s Japan Strategic Fund -- with Hoare.
A trigger for earnings growth
While improving exports and global growth prospects are lifting the outlook moderately for Asian earnings, Asian equities still face the risk of whether China will be able to make the transition to higher consumption without a major slowdown in growth.
‘Overall, we predict that tail risk will ease in China, allowing for a more balanced analysis and higher valuations,’ Davids said.
He doesn’t expect the property market to crash, although he does expect it to slow.
‘Equally, the government seems determined to push through some bitter reforms which will create investment opportunities,’ he added.
‘The stabilising economic picture in China should continue to restore investor confidence and underpin the stock market’s ongoing resurgence,’ he said.
In the three years to June 30, 2014, JP Morgan’s Asia Pacific Strategic Equity fund returned 15.04% compared with the MSCI AC Asia Pacific ex-Japan index’s gain of 13.02%.