Despite the uncertain policies in the aftermath of the US election, including trade friction, a stronger dollar, and President Trump’s rhetoric around protectionism and anti-globalisation, the improving economic cycle in emerging markets and Asia will remain the primary driver for the region’s equity investment to grow.
That’s according to Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset Management.
Wong said EM and Asian equities continue to make a strong investment case. ‘Their structural drivers remain strong and valuations are attractive from a long-term investment perspective with Asia ex Japan equities trading at 1.5x on a price-to-book (P/B) basis, below both their own historic average and developed market equities,’ he said.
‘Also while return-on-equities are still depressed, they have stabilised at low levels, where we see some signs of improvement in productivity growth and increased competitiveness on the back of lower real wage growth as well as some currency adjustments.’
The equity head said the outlook for most Asian economies has improved due to a strengthening in external balances and slowdown in credit growth in most countries, with the notable exception of China.
China offers opportunity
On China, Wong believes the risks of a hard landing for China are slim in the next few years, even as the deceleration of China’s economy seems to have stabilised as it rebalances from an investment-led to a services-led economy.
‘The quality of growth and cash flows should improve over time as China implements reforms to address issues such as problematic debt levels and overcapacity in state-owned enterprises,’ said Wong.
‘These significant changes in the economic structure are providing investment opportunities especially within the services sectors, such as e-commerce, social media, education and insurance.’
India's long term prosperity
According to Wong, India’s nascent economic recovery seems to have been temporarily halted with the recent demonetization move.
‘This is causing short-term disruption but in the longer term, it could benefit the country with greater transparency and improved tax collections,’ said Wong.
‘The formalization of the cash economy and tackling unaccounted income will also be important to a successful rollout of the GST bill, the benefits of which would accrue over the next several years in terms of improving productivity and boosting fiscal revenues.’
‘The current cash crunch is impacting consumer demand and will likely continue to do so for the near term.’
As evidenced by the demonetization drive, Wong believes that the Modi government will focus on removing bottlenecks and pushing through calibrated reforms to revive investments for sustained growth in the medium term. ‘To drive stronger growth however, the country needs a sustained revival of its investment cycle.’
Thailand remains solid
Year-to-date, Thailand is the best performing market in Asia, Wong said.
'While Thai assets have been under pressure lately following the King’s passing away and near term concerns about reduced consumption and
infrastructure spending, we continue to view Thailand as a low risk economy with a large current account surplus, low public debt, low inflation and a strong banking system.'
Additionally, Wong said his team's analysis shows large opportunities exist at the sector level including in consumers, internet/e-commerce and financials.