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S&P sell-off: the good and bad for Asian investors

Asian markets tumbled, recovered, and then some went back into the red after a global equity sell-off on Monday. We asked asset managers what this means for investors in the region – and they revealed the ‘good’ and the ‘bad’

Ayaz Ebrahim, co-head of Asia Pacific regional team, emerging markets Asia Pacific equities

J.P. Morgan Asset Management

The ‘good’ aspect to this market correction is that it’s actually quite healthy. To put things in perspective, a typical bull market usually experiences drawdowns and markets had been getting a bit frothy, so it’s not unusual to have a pullback.

If we look at all of the broad fundamentals, they are still intact - economic growth remains strong and corporate earnings continue to be upgraded across US, Asia, Japan, and Europe.  Interest rates moving (modestly) upwards as a reflection of good economic growth is a positive, as long as interest rates don’t spike aggressively.

Asia Pacific equities generally speaking look attractively valued, both relative to other markets and relative to their own history. Even at these levels following strong returns last year, valuations are not stretched. Price-to-book valuations are not trading above their long-term average and 12 month forward price-to-earnings ratio is around 14x, which is quite reasonable.

Our constructive view has not changed in light of this volatility, if anything we would perceive a buying opportunity from any further sell-offs.

We are firmly of the view that we are no more than mid-cycle in EM equities, with the recovery only really having started during 2016. Earnings are picking up but are still a far cry from earlier peaks and valuations are not particularly demanding.

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Ayaz Ebrahim, co-head of Asia Pacific regional team, emerging markets Asia Pacific equities

J.P. Morgan Asset Management

The ‘good’ aspect to this market correction is that it’s actually quite healthy. To put things in perspective, a typical bull market usually experiences drawdowns and markets had been getting a bit frothy, so it’s not unusual to have a pullback.

If we look at all of the broad fundamentals, they are still intact - economic growth remains strong and corporate earnings continue to be upgraded across US, Asia, Japan, and Europe.  Interest rates moving (modestly) upwards as a reflection of good economic growth is a positive, as long as interest rates don’t spike aggressively.

Asia Pacific equities generally speaking look attractively valued, both relative to other markets and relative to their own history. Even at these levels following strong returns last year, valuations are not stretched. Price-to-book valuations are not trading above their long-term average and 12 month forward price-to-earnings ratio is around 14x, which is quite reasonable.

Our constructive view has not changed in light of this volatility, if anything we would perceive a buying opportunity from any further sell-offs.

We are firmly of the view that we are no more than mid-cycle in EM equities, with the recovery only really having started during 2016. Earnings are picking up but are still a far cry from earlier peaks and valuations are not particularly demanding.

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Eoin Murray, head of investment

Hermes Investment Management

There is good and bad news for investors, the good is that I do not believe this is the big market correction we have been anticipating for some time. The backdrop remains a strong economy with decent corporate fundamentals, and after a period of a week or two we expect that markets will stabilise, albeit with less froth.

The bad news is that the numbers currently show that those investors in short volatility ETFs, quants and CTAs with leverage will be the investors hit the hardest this time. My time horizon is much further out into 2019 where I believe a perfect storm of rate rises, central banks unwinding balance sheets and inflation will drive a much larger market correction. 

Whilst we may see a couple more drops this week and next as 2017’s euphoric investor sentiment dies out, the markets are down, but not out. Not yet anyway.

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Andy Wong, senior investment manager

Pictet Asset Management

Market correction, there is good and bad for Asian investors – what is the good? A correction that takes out some of the exuberance and imbalances that has built up is healthy, for example, the accumulated short volatility trades. 

A correction is healthy to ensure a more sustainable market ascent in the longer term. We saw signs of overheating in January when the market was rising too far, too fast. The emergence of animal spirits and subsequent imbalances can prove to be a risk. We do not see this as the beginning of a larger bear market in equities though as macro fundamentals remain solid and the risk of a recession is low.

What is the bad? The correction was overdue as global markets have had a stellar run-up last year and in January.  With normalizing interest rates and worries on inflation coming into the picture, investors should expect more volatility going forward.  

If the market downdraft impacts progress of the economic rebalancing or tightens financial conditions excessively, global economy could be affected.

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Catherine Yeung, investment director

Fidelity International

The market sell-off yesterday was not driven by fundamentals. Fundamental investors were a bit concerned at the end of last week given data out of the US and the spike in bond yields. We have been saying that consensus inflation and wage growth expectations look too low and could surprise on the upside, hence impacting the rate of expected rate hikes.

As a long-term and bottom-up investor, we are mindful that the current sell-off is more systematic driven versus fundamental. Investors should stay calm and look at the longer-term perspectives from a fundamental perspective but having said this, as investors remain very long equities, and with volatility spiking further, we could see more periods of selling.

When it comes to Chinese and Hong Kong equities, the southbound trading via the Stock Connect scheme still holds up, while the risk is that the flows are narrow and very much skewed to a few names.

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