Sector rotation has been the key driver of recent market movement in Asian markets, as investors begin to take profit in some of the cyclical names that had performed strongly in previous months, according to Tahnoon Pasha, Hong Kong-based head of equities at MFC Global Investment Management. Economic indicators continue to be favourable, he says, and liquidity conditions continue to be supportive of Asian equity markets. In January this year, MFC Global strengthened its Asian equities team, reflecting the growing importance of the region to the fund house.
However, MFC Global believes that valuations across the region are approaching fair value, after the dramatic rise in markets witnessed in the last few months. Consensus earnings expectations are improving and markets are looking for evidence of improvements in corporate earnings during the reporting season, before resuming any upward moves.
The focal point of the recent rally in Asian stocks has been China as a consequence of the rapid execution of its stimulus spending, Pasha notes. Commodities trade to China has buoyed bulk trade and resource prices. Substantial infrastructure spending has lifted machinery stocks locally and in Korea and Japan. Consumer subsidies have raised demand for consumer electronics and more recently automobiles around the region. A significant increase in lending has propelled both local real estate demand and given China's state-owned businesses a war chest to launch acquisitions overseas.
Looking at a long-term investment horizon, MFC Global remains committed to China, however.
"We maintain our view that it is not too late to buy China," Pasha says. "We believe that we are in the first phase of a multi-year outperformance period for China, and one which will migrate up to core blue-chip names which will benefit from improved earnings from domestic growth and a sharp recovery in exports from exceptionally subdued levels."
In a previous interview with Colin Ng, the Hong Kong-based regional head for Asia-Pacific equities at MFC Global, he noted that, on a 12-month time horizon, China will continue to perform well as the country has demonstrated a high level of fiscal and monetary flexibility. The emergence of the urban middle class will also drive domestic consumption higher, he adds.