While Asian equities represent high beta investing in the global equity sphere, the asset class is deemed to be constructive for at least the next 12 to 18 months and deserve to be part of the portfolio for global investors.
According to J.P. Morgan Asset Management (J.P. Morgan AM)’s commentary, 2018 and 2019 are likely to be years where Asian headline earnings growth slows down, but is more evenly distributed across sectors.
Although Asian corporate earnings revived with impressive headline numbers in 2017, the asset manager said that would be hard to sustain in the next 12-18 months.
The energy and materials sectors have rebounded in 2017 from the low base set by earnings recessions in earlier years, it said in a commentary.
Technology, led by hardware manufacturers in Taiwan and South Korea and internet companies in China, also enjoyed a very good year, the firm added.
“We would expect slightly more muted earnings performance to also be more evenly distributed. The big difference in return performance for Asian equities between 2017 and previous years has been earnings.’
The earnings growth for Asian equities in 2017 was artificially boosted by a low base and will be hard to duplicate.
Nevertheless, the current global growth momentum would imply that the current market consensus of between 10% and 12% earnings growth for the next 12 months is reasonable, J.P. Morgan highlights.
With in-depth research and insights to fully understand the industry landscape and corporate governance philosophy, investors could potentially enhance their returns via additional alpha generation, it added.
Additionally, the current level of Asian equity valuations are in line with their long-term averages, which imply that there is some buffer to absorb short term shocks.
Although the local market strength in 2017 has weakened demand for diversification for Asian investors, J.P. Morgan said it see benefits in taking advantage of the diverse opportunities in Asia by investing across the region, rather than in one or two markets.
It said the current growth environment favours those investors that have a bias towards companies and sectors that can reap the benefits of this expansion phase.
However, more conservative investors may also opt for income generation by looking out for companies that offer high dividend opportunities along with attractive levels of earnings growth.