For the last Year of the Dog outlook question, AsianInvestor chose to look at an asset class central to many regional investors: its equity markets. 

At a time of slowing economic growth in China, an Indian economy that has overtaken it in terms of expansion, and the promise held by various Southeast Asian markets, many equity markets hold the promise to outperform in the region. Added to this, some countries could benefit from a robust global economy improving export flows too.

With all of these positives in mind we asked the following: 

What will be the best performing Asian stock market?

Answer: China’s stock markets

Equity markets in Asia rallied strongly in 2017, with returns up around 33% from less than 4% in 2016, according to the MSCI AC Asia index. MSCI’s Asean index posted a return of 30% last year, and the Japan index had year-end returns of 24%. 

Over and above them all, however, was the Chinese stock market, with the MSCI China index returning 54% in 2017.

Stronger-than-expected GDP growth, a resilient property market, and strong employment ensured China had the top-performing stock market in the world last year. Tech stocks led; the MSCI China information technology index, which includes Tencent, Alibaba, Baidu, and Sina, rose 79%.

The Chinese economy should grow slower this year—the World Bank forecasts 6.4% growth in 2018, down from 6.8% in 2017, as the country delevers and monetary policy tightens. But AsianInvestor believes Chinese offshore and onshore equities will still do best among Asia’s stock markets, due to strong earnings growth. 

Chinese offshore equities, or H-shares, are expected to have earnings growth of 14.8% in 2018, according to a report by ETF asset manager Premia Partners. The global economy will help; the World Bank expects it to enjoy slightly higher growth of 3.1% in 2018, versus 3% last year.

While China’s stock markets may not repeat 2018’s massive gains, they could still increase another 15%. Chinese A-shares could be particularly appealing.The mainland-based stocks didn’t quite reach the level of returns in the H-share market, rising by 22% in 2017, according to the CSI 300 index. And large cap tech stocks, like Tencent and Alibaba, as well as real estate firms like Evergrande and Sunac, enjoyed most of the inflows into A-shares in 2017.

But many other onshore equities trade at attractive valuations and have good fundamentals, especially with rising consumption and urbanisation in China. That could cause a rotation out of the tech and property sectors and into industries such as financial institutions, which lagged last year’s rally, plus consumer companies, industrials, and materials. Technology, education, and healthcare should also thrive as the population gets richer.

Beijing’s focus on supply side reforms and deleveraging has led it to place more emphasis on higher quality, long-term growth. That should attract more foreign investors, most of whom are still underweight China in terms of their positioning among pan-Asia or emerging market funds. 

As the Chinese stock market continues its growth in 2018, these overseas investors could look to weigh up. Better late than never. 

Please see below for all of the other Year of the Dog predictions: 

Will regional Asian institutional investors embrace robo funds? 

What will be the best-performing alternative asset class, on a risk-adjusted basis?

Will there be any post-election regime changes in Southeast Asia?

Will China's debt burden become a major drag on the economy?

Will Bank of Japan's quest to create inflation succeed 

​Are European and UK securities a good bet this year?

Will the US Treasury yield curve invert?

Will Donald Trump still be president at the end of 2018?

What will be the best performing asset class, on a risk-adjusted basis?