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.
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.
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.