Asian equities have underperformed world markets for more than five years and valuations are at or below long term benchmarks, but the FT's Jennifer Hughes warns that headwinds could derail any optimism.
JENNIFER HUGHES: When a market is held to be good for stock picking, you can bet that it's wallowing in the doldrums with no tailwind in sight. We've heard that a lot in Asia recently. But the problem with that advice is that so far this year there has, in fact, been a tailwind.
The question is are we talking a mere puff of wind or is the long lull over? So far this year the region standard, the MSCI Asia-ex-Japan has gained 6.7% and the world or developed index, just 3.1%. What goes for Asia, goes for EM performance generally, with more than 2/3 of the global MSCI index hailing from the region.
Worldwide, emerging market gains are being driven by higher-risk cyclical stocks as a sharp contrast to recent years when disinflationary pressures have favoured defensive companies with low leverage and stable earnings. That shift argues in favour of Asia which are bound in low-margin asset-heavy manufacturers who need high turnover to drive cash flow.
Emerging Asia is also due a recovery. The NEJ index has underperformed the developed world benchmark for five years and counting. The hope then, is that a nadir has now been reached. Asian stocks are at or below their long-term valuations, world developed markets are trading higher. It isn't the big stretch either to identify strong tailwinds among emerging Asia's decent growth prospects, strong demographics, China aside, and some reform-minded leaders.
Expectations for an 8% rise in earnings this year are hardly extreme. But this breezy optimism must also factor in the US. A strong dollar works against emerging markets' performance compared with developed markets. And Asia's responsibility for 2/3 of the US trade deficit put it at high risk of punitive action given president Trump's threats of trade storms. It may well be Asia's turn to outperform, but it faces significant headwinds in doing so. In this environment, remaining becalmed doesn't seem so bad if, alas, unlikely.