Asian equities remain attractive

Barings sees ongoing normalization of global and Asian growth

Viewpoint

ASIA enjoys a stronger, more stable and predictable growth profile next to other emerging and developed markets. A pro-growth fiscal policy stance among policymakers across the region has continued to be a positive economic driver. A benign inflationary backdrop has provided central banks with scope to adjust generally neutral monetary policies.

Stronger trends in domestic demand growth, fuelled by favourable demographics and rising household incomes, will likely remain a positive structural catalyst for longer-term economic momentum and equity market performance. The stabilization of China's economic growth to a more sustainable level cuts the risk of growth disappointments.

After a solid 2017, the early part of 2018 has been marked by increased volatility across equity markets. Macro developments, including US Federal Reserve interest rate hikes and concerns over a potential trade dispute between the US and China, have dampened investor sentiment towards Asia and global equity markets. Key events occurred in the background, such as the election of China's 13th National People's Congress which pointed to a continued focus on structural reforms. President Xi got a vote of confidence for his political and economic reform initiatives.

While market volatility may dominate the headlines in the near term, we do not foresee a structural deterioration in the overall sustainable growth trend within the region. Some of the challenges facing the Asian markets and news headlines targeting the region may stem from increased competitiveness. We believe that near-term market volatility can provide a window for investors with a long-term, fundamental perspective to harness attractive opportunities.

While Asian equities snapped a multi-year period of relative underperformance versus global equity markets and continued to rally, most of the outperformance has been due to upward revisions of Asian corporate earnings amid a positive economic backdrop and improving fundamentals. Equity valuations generally remain reasonable compared with long-term averages. Asia overall has continued to trade at a significant discount to developed markets. So we do not expect valuations to deter many investors.

We expect the recovery in Asian corporate profit margins to continue on structural factors — cost discipline and favourable supply and demand (eg, IT and consumer). In our view, these factors will bolster corporate profits from 2018. A maturing equity culture in Asia is another catalyst, as regional economies and financial markets (especially North Asia) continue to develop.

Lee is head of Asian equities at Barings and takes the lead role in the management of regional Asia ex Japan products and mandates including Baring Asia Growth Fund and Baring Eastern Trust.

Date

16 May 2018

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