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Bullish case for EM Asian equities grows louder

Historical precedents, limited central bank tightening, earnings momentum—all are cited as factors supporting the market, although the mix of growth looks set to change.
Bullish case for EM Asian equities grows louder

Asian and emerging market equities are set to continue soaring through 2018 and beyond, courtesy of strong corporate earnings and a stubbornly benign monetary backdrop, say market researchers, noting the encouraging historical precedents.

Among the most bullish are equity strategists at Bank of America Merrill Lynch (BAML).  

‘We are not persuaded by the argument of “rising inflation, rising yields, central bank tightening”,’ BAML's Ajay Singh Kapur told AsianInvestor via email.

The US has raised interest rates twice so far this year, albeit to a still-low target range of 1% to 1.25%, and talk is building that the UK might also tighten policy and that the Federal Reserve will soon begin to pare back the debt investments it accumulated to support the US economy after the financial crisis.  

But Kapur downplays the risks. For him, the combined balance sheet size of the Fed, Bank of England, European Central Bank and Bank of Japan will not contract before 2019 and inflation will remain lower for longer, supporting the wider global economy and providing a favourable tailwind for Asian and EM equities.

If history is any guide there is still plenty of upside for Asian and EM equities, whose current bull market shares similarities with the six that have come before it since 1976, including sharp contractions in nominal GDP and loan growth in the five years prior to hitting bottom at around 1.3 times book value.
 
On average, these bull markets have lasted about 42 months and pushed EM equities up about 230%, broadly treble the gains recorded by the S&P 500 over the same period, according to a BAML report released on Sept. 14.
 
Kapur expects the MSCI Asia ex-Japan and MSCI Emerging Market indices, both up roughly 60% since January 2016, to double over the next two years, with some variations between individual Asian/EM country performances.
 
Whether such sell-side bullishness influences actual investor behaviour remains to be seen. Data from the Institute of International Finance showed foreign investors turning a tad more cautious in August: for a ninth straight month they put more capital into EM debt and equities than took out, but at $16 billion it was the lowest monthly inflow since January.
 
At pensions and investment consultancy Mercer the advice to clients is stay positive, not least
Asian investors who are naturally more inclined to maintain a high exposure to Asian equities.
 
"Recovery in the markets have been welcomed and we see clients holding on to their EM exposure or being more willing to await turnaround by global equity managers that previously had a strong EM bias," Adeline Tan, head of advisory at Mercer, told AsianInvestor.
 
Growth mix

Others are also bullish, but with some provisos.

Asian and EM equities should be able to achieve mid-single digit growth over the next six months and to put on about 10% per year for the next three to five years, Arthur Kwong, head of APAC Equities at BNP Paribas Asset Management, told AsianInvestor.

“Double is hard to say," Kwong said. "I would not be putting in that high expectation at this moment, unless earnings are able to outweigh the expectation by a large extent. I would be more prudent on the growth expectation.”

He cites the demographic changes that will change the mixture of future EM and Asian growth, to the benefit of some industries and companies, certainly, but to the detriment of others. Take China, where the government is set to invest more on healthcare services than in the past because of an ageing population, having previously probably spent more on developing infrastructure and enhancing the growth potential of the economy.

“I am bullish. But I also need to be aware that the formula has changed to a slower growth,” Kwong said.
 
Earnings momentum

Cyclical factors bode well nonetheless, not least a recovery in Asian and EM corporate earnings.

Coupled with appreciating EM currencies, HSBC Global Asset Management is upbeat about the market's outlook for the next 12 months, with overweight positions both on Asian equities and EM equities.

“This has not happened for many years but for this year, many analysts have revised up their earnings estimates [for EM],” Grace Tam, Hong Kong-based senior market specialist at HSBC Global AM, told AsianInvestor.

In a September 4 report, AXA Investment Managers said EM equities posted better-than-expected earnings growth of 9% across the second-quarter earnings season.

But here too there would appear to be plenty of upside left.

Global equities ex-US are trading at a steep discount to the US, with EM remaining the most attractive on a relative value basis, the AXA report shows. Also, EM earnings per share levels remain 24% below their previous peaks, it said. 

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