Going into 2017, there are numerous catalysts emerging from Asia as investors seek growth and earnings beyond developed markets as Donald Trump's win induces short-term volatility, according to Ronald CC Chan, CIO, equities, Asia (ex-Japan) of Manulife Asset Management.
‘Asia has experienced multiple years of earnings downgrades, but valuations and the economic outlook is looking up,’ Chan said.
‘Now we are seeing producer price index (China) turn to positive, while stabilisation seems to be coming through; I believe more catalysts are coming from Asia.'
Currently, Chan also said Asia ex-Japan’s MSCI price-to-earnings estimate and price-to-book value were below that of developed markets. ‘Many regional markets are now experiencing a recovery in corporate earnings.’
The stabilisation of China’s economy is another catalyst that will drive regional growth. China’s third quarter economic growth came in with a third consecutive reading in 2016 of 6.7%.
‘Of note, the National Bureau of Statistics’ Manufacturing PMI crossed further into expansionary territory at 51.2 in October, while the producer price index in September turned positive for the first time in almost five years,’ he said.
‘China’s economic rebound will have positive knock-on effects for other regional economies.’
During Trump’s campaign, he cited China and countries that benefit from outsourcing as potential targets of punitive measures when he assumes office.
‘For China, while this may complicate its economic path, the interconnectedness of the two economies, coupled with further fiscal and monetary stimulus options, may mitigate some of the impact.
‘Some countries in Asia may be negatively impacted by two policies: policies to reduce offshoring from US companies and a promise not to sign the Trans-Pacific Partnership in its current form.’
Amidst these uncertainties, Chan believes there is substantial ammunition that Asian government and corporates can employ.
‘There is still a lot of pump-priming that China can do, e.g. infrastructure spending, consumer-led or housing policies, which could be put in place in case the market situation deteriorates,’ Chan said.
‘Multi hub’ global economy
Over the medium-to long-term, Chan believes that investors will see that Asia’s role in the global economy is strengthening as the world moves to a 'multi hub' economy, with hubs in North America, Europe, and Asia.
‘Many countries in Asia historically depended on exports to consumers in developed markets for economic growth.
‘This dynamic is gradually changing as Asian countries are less dependent on net exports to drive growth.
'Export-dependent countries, such as China, Korea and Taiwan, are transitioning to service economies with greater consumption, while countries across the region are witnessing an increase in the middle class,’ Chan added.