In 2018 a number of government policies and market moves are sending shockwaves through Asian markets. The recent global equity sell-off, although a long time coming, probably turned the most heads, causing Asian markets to tumble, recover and then go back into the red.
According to Daryl Liew, Reyl’s Singapore-based Asia CIO, north Asian markets suffered the brunt of the correction in February, but this was partly because they were also the ones that rallied in January and did well in 2017. Southeast Asian markets held up better during the sell-off.
Taxing times for India
This was followed by India’s move to re-introduce capital gains tax (CGT) on equity investments. In the latest annual budget announcement, finance minister Arun Jaitley said profits exceeding INR100,000 ($1,500) from shares held for over a year will be taxed at 10%, without accounting for inflation indexation.
The proposal also introduced a 10% dividend distribution tax on equity-focused mutual funds. India’s benchmark S&P BSE Sensex index suffered two days of losses in the wake of the announcement.
A week later, India’s national stock exchanges released a joint statement announcing plans to stop licensing their securities to foreign exchanges, which is likely to disrupt trading.
Trade war fears
Then came the US. As Citywire Private Wealth was going to press, president Donald Trump confirmed plans to impose import tariffs of 25% on steel products and 10% on aluminium products, rattling financial markets. The move came after the president imposed tariffs on imports of Chinese solar panels, washing machines and aluminium foil. Asian shares were subdued amid fears of a global trade war, while the safe-haven yen rose.
South Korea’s KOSPI slipped, with technology companies trading mixed in early session. Australia’s S&P/ASX traded lower and the country’s ‘big four’ banks traded in negative territory. In China, the Hang Seng Index and the Shanghai Composite Index declined.
‘Clearly, new concerns over trade wars and rising inflationary concerns have weighed on market confidence,’ says Arjan de Boer, Asia head of markets, investments and structuring at Indosuez Wealth Management.
‘Meanwhile, recent USD strength has prompted concerns on capital outflows. That said, the global business cycle is still in good shape going into 2018. Unemployment rates are low, the earnings season has been quite positive and there has been a revival of world trade and global industrial production.
‘Meanwhile, inflation expectations remain fairly modest. As such, we do not see it as a reflection of justified bears, even with respect to slightly rising inflation or central bank tightening,’ he said.
The ‘buy’ list
UBS continues to prefer equities over bonds due to the region’s strong fundamentals and robust earnings growth. It remains overweight the equity markets of China, Indonesia and Thailand and underweight Malaysia, the Philippines and Taiwan.
It prefers shorter-dated bonds, floating-rate notes and select Chinese credits, avoiding higher-duration single-A bonds, perpetuals with weak structures and single-B-rated bonds. It said the gyrations in equity markets seem to have been an overreaction to the beginning of the normalisation of inflation and longer-term interest rates in the US and other developed markets.
As such, Asian investors should not fear higher inflation, the bank says, because it will be driven by stronger investment and labour markets, rather than supply constraints. It expects inflation in Asia to accelerate by 0.5% to 1% this year and Asian central banks to gradually lift policy rates.
Credit Suisse has turned positive on Chinese equities, citing strong economic momentum, earnings recovery and southbound inflows.
‘Asian financials continue to offer value, as repricing of the growth environment and rising inflation expectations are reviving risk-sentiments for the sector. Higher local bond yields, subsiding asset quality pressure and a benign macroeconomic environment are leading to an earnings recovery for Chinese banks,’ notes CIO Michael Strobaek.
Indonesia has one of the strongest fundamental outlooks in the Association of Southeast Asian Nations region, with low household debt, ample fiscal space, moderate inflation, stable governance and low political risk, according to DBS. Its newly appointed CIO, Hou Wey Fook, believes Asia is well placed for another year of strong growth.
Asia ex-Japan equities, DBS says, offer more upside potential than their developed market peers. It trades at attractive valuations relative to its peers while generating higher earnings growth.
‘In general, we are bullish on energy and we think energy stocks are due to catch up. Contrary to 2017, though, where all markets went up in a synchronised fashion, we advise our clients the following: hold riskier assets, but be more tactical in your allocation and contrarian,’ says De Boer.
‘We advise our clients to move emerging markets to the core of their portfolios, so we are overweight in Asia, which offers the best expected risk-adjusted returns at this stage. A weak USD outlook and improved conditions should bode well for Asian equities. Another interesting area lies in the more illiquid markets, such as private equity.’
Reyl likes north Asian markets, mainly because they are the principal beneficiaries of the continuing synchronised global growth story, adds Reyl’s Liew.
Korea and China H-shares are the cheapest markets in Asia, trading at forward P/E multiples of 8.7x and 7x respectively.
The ‘sell’ list
Credit Suisse maintains its ‘underperform’ view on Malaysia and Thailand because of their low earnings growth rates. It also expects India to underperform, following its 2018 budget announcement.
The introduction of 10% CGT on equities could reduce the attractiveness of the asset class in India, Credit Suisse says. The bank expects Asian hard currency bonds to remain volatile due to their high sensitivity to global government bond yields.
Emerging market hard currency funds saw outflows of about $1.1 billion, driven by underperformance in countries such as Indonesia, the Philippines and India, according to UBS.
Liew agrees. ‘We are cautious on the Philippines leading into 2018 due to macro concerns such as sluggish foreign inflows and poor corporate earnings growth,’ he says. ‘Valuation was also the main reason we were cautious on Indian stocks.’
Investors are questioning fixed income sectors in the developed world, too. According to Citi Private Bank’s chief Asia strategist, Ken Peng, eurozone sovereign bonds eight years and under have negative yields, while eurozone nominal GDP growth is 4%. Investors could sell down eurozone bonds as the ECB’s QE programme approaches the end.
Indosuez is not keen on euro investment-grade and US high-yield credit. It recommends investors stay away from government bonds at this stage, except in Japan, and be wary of US and UK equity markets.
‘Investors should be keen on equities in Europe and Asia, post the correction. However, instead of simply identifying selected markets, investors should now consider focusing more on specific stock selection after a non-recessionary correction,’ De Boer concludes.
This article originally appeared in a supplement published with the March edition of Citywire Private Wealth magazine.