Asian equities could prove to be a good bet for 2016, despite the potentially negative impact of the US Federal Reserve’s December move to start raising interest rates, argue portfolio managers.
One key argument is that regional stocks are cheap, so investors who are prepared to buy on weakness and stomach the inevitable volatility should do well over the medium term. The average price-to-book ratio on the MSCI Asia-Pacific ex-Japan Index stood at 1.31x for Japanese stocks' was 1.64x, as of end-December.
The chart below, supplied by Old Mutual Global Investors (Omgi), suggests a high probability of profit in 2016 and beyond based on current Asian stock valuations. Josh Crabb, head of Asian strategies at Omgi in Hong Kong, said: “There has never been an occasion over the last 20 years when investors have not made money on a 12-month view from these starting valuations.”
Certainly, Thailand’s Government Pension Fund is overweighting equities versus bonds. “We are cautious about the volatility in equity markets, so we are focused on value stocks,” said Man Juttijudata, senior director of investment strategy at GPF.
“We like Japan, mostly due to our confidence that [Prime Minister Shinzo] Abe’s economic policy is working and inflation remains low. We also like India for the infrastructure theme and because its economy is not affected so much by external factors.”
Sector-wise, low price-to-book valuations suggest financial-sector equities in particular are cheap. Valuations and dividend yields of Hong Kong banks, including Chinese banks listed in the city, look compelling if investors are willing to assume a degree of risk and can invest for one to three years, said Amit Prakash, managing director of BMO Global Asset Management in Hong Kong.
That is how valuation plays often work. China’s economy and its banks are going through a drawn-out transition from investment-led to consumption-led growth, so this is a longer-term value opportunity.
China and India?
However, many investors are sceptical that the country will return to strong and sustainable GDP expansion, but they take heart in the leadership’s desire to do so. That should help keep the wheels on even as growth decelerates.
Following the release of the 13th Five-Year Plan, President Xi Jinping reiterated the goal of doubling Chinese GDP and household income by 2020, from 2010 levels. This implies an average growth rate of at least 6.5% for 2016-2020.
China may have a tough leader, but India has a "wishy-washy" one in Narenda Modi, said Enzio von Pfeil, investment strategist at Hong Kong-based advisory firm Private Capital. He added that China would use the powerful combination of monetary and fiscal stimulus to stabilise the economy and support domestic demand.
Yet there are those who favour India, despite the fact that it is seen as relatively more expensive than other stock markets in the region. Ben Rudd, chief investment officer at Hong Kong-based family office Caravel, said India may be the market that performs best in 2016, owing to its continued economic acceleration and low commodity prices.
But stock selectivity is key here, said Omgi’s Crabb. “[India’s] broader mainstream index is not only expensive, but also fails to reflect where the real opportunities lie,” he noted. Omgi favours “selected opportunities in infrastructure and manufacturing, both of which will be underpinned by supportive policy direction”.
Volatility a key risk
One thing investors can count on this year is turbulence. Markets have had plenty of time to digest the idea of a series of interest rate hikes next year, but sentiment can change very quickly when it comes to US rate policy.
The markets have a tendency to over-react, said BMO’s Prakash: “Think of what happened during the ‘taper tantrum’, when effectively no meaningful monetary policy change was actually implemented. A lack of consensus around the timing and trajectory of the rate hikes will only add to volatility.”