AsianInvestor’s editorial team set out this month to ask and answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.

Here we present our response to question number four, with the other forecasts so far listed at the end of the article. The feature appears in full in the forthcoming (February) issue of the magazine.

Question 4: Will Asian equity makets outperform in 2016?
Answer: No

On a risk-reward basis, developed market equities are expected to perform better than their Asian counterparts this year. But given divergence in valuations and monetary policy, it’s more important to look at specific markets than global equity as a whole.

Among developed markets, European equities continue to be preferred to the US and Japan. The eurozone is still in an expansion cycle with accommodative monetary policy and earnings growth is also more robust than in the US, where profit margins are squeezed by the strong dollar and higher employment costs.

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Following years of underperformance, Asia ex-Japan indices were trading at an 11-year low relative to the MSCI World index in terms of forward price-to-earnings (PE). But the prospect of Asian equity markets outperforming only becomes reasonable if their currencies start to stabilise, home markets’ current accounts turn positive, and their debt-to-GDP ratios stabilise.

Asian equity markets have seldom been cheaper. But the problem has been a declining return-on-equity due to weaker top-line growth and weak earnings momentum, given the muted growth outlook. 

Certainly there is potential for a rally on valuation grounds, but uncertainty over US interest rates, RMB depreciation and a continued slowdown in China remain big risk factors. 

Investors are urged to pay attention to the currency component of their returns when investing in Asian equities, since divergence in monetary policy can result in drastically different results.

Other predictions so far:

Will the US Federal Reserve raise rates in 2016?

Will Japan hit Shinzo Abe’s inflation target in 2016?

Will the RMB continue to depreciate against the dollar?