The bellwether S&P 500 index enjoyed its longest uninterrupted bull run ever as it entered 2018. In other words, global stock markets had a correction coming. And so it emerged, with market drops of November and December taking place after an initial period of volatility late last January.
2018 may be best viewed as a turning point, when the synchronised global economic growth that had characterised 2017 was replaced by heightened macroeconomic uncertainty, courtesy of evaporating liquidity and intensifying US-China trade tensions.
This played out painfully in global and emerging stock markets. After returning 41.7% in 2017, the MSCI All Country Asia ex-Japan Index fell 16.75% last year.
This year has so far provided no respite. On the first trading day of 2019 most Asian stock markets fell – with China's CSI 300 down 1.4% and Hong Kong losing 2.8%.
That leaves institutional investors with a compelling question: is the market close to bottoming and offering a buying opportunity? Or will the US-led tightening in global monetary conditions and the political posturing that has savaged relations between the world's two economic superpowers continue to weigh on markets in 2019?
AsianInvestor asked a pair of equity strategists and a portfolio manager what they thought, following a similar inquest a month ago.
The following extracts have been edited for brevity and clarity.
Frank Benzimra, head of Asia equity strategy
2019 should remain a challenging year for Asian equities due to an extended growth slowdown in China, the risk of an overly hawkish Fed and a correcting US equity market. A ceasefire in the US-China trade conflict is the upside risk.
We expect major indices in Asia to end 2019 at a lower level than today ... The reason lies in the radical uncertainty surrounding the trade negotiations. The outcome is unpredictable. In our view, a massive policy response from China to tackle the growth slowdown is not on the cards, the deleveraging effort is not over, and the Fed is tightening. If US share prices correct there will be no decoupling.
We expect Japan to outperform Asia due to its improving nominal growth trend. Japan share prices do not factor in the price regime shift and improving growth potential. We expect compression in the Japan equity risk premium from its current extremely high level. The planned consumption tax hike is a risk, but our Japan economists expect a looser fiscal policy to offset its recessionary impact. We like domestic cyclicals.
Mark Tinker, head of Framlington Equities Asia
Axa Investment Managers
In 2019 we think it is important for Asian equity investors to be positioned for any ‘upside surprise’ from the talks [between the US and China on trade], as both rhetoric and positioning is very negative. Despite an ongoing economic cold war, they will ultimately come to an accommodation on quite a lot of the more obvious trade issues, which can be seen as opportunities in the Asian equities space.
From a broader perspective, a rotation out of emerging markets in 2018 summer triggered aggressive technical selling that has left pockets of significant value in Asian equity. Long-term investors are now seeing signs of stability at the beta level and are looking to pick up oversold quality and growth.
Specific to Chinese equities, we are wary of buying through an index as they represent poor ‘portfolios’. They are either heavily biased to old-economy [stocks] or too heavily skewed to single technology stocks (MSCI China, one point 18% Tencent). We continue to believe quality stocks with exposure to China’s fourth industrial revolution/digital consumer growth drivers can continue to deliver profits, which are now much better value to buy.
Next year will be a lot about politics and policy again.
Sarah Lien, client portfolio manager
Asian equities are positioned to outperform in 2019 as the US dollar, oil prices and interest rates are starting to weaken. Trade restrictions and other market shocks could, and probably will, continue to drive volatility higher over the rest of the year and into 2019, but Eastspring’s long-term outlook is positive.
We believe the best investment opportunities are often unloved, ignored and under-appreciated by the market. When markets sell off indiscriminately on macro noise, there is the opportunity to buy good businesses at better prices. Today’s fears have driven markets, especially in Asia, to valuations that are difficult to justify. Typically, when markets are priced at this level of 1.5 times price-to-book ratio, the next 12 months have had a positive return outcome.
For investors wanting equity upside exposure but [who haven't got] the stomach for big swings, we recommend low volatility strategies, which enable investors to benefit from the growth in equities without experiencing the severe drawdowns. This is a defensive equity strategy that offers downside protection, income, and potentially higher returns.