Synchronised Global Growth and Central Bank Support Keep Asian Equities Attractive in 2018

Major equity markets rallied sharply in 2017 as early-year expectations of protectionist policies never materialised while commodity prices and global trade dynamics recovered.

This fading protectionism has augured well for emerging markets, particularly Asia and its major export-driven economies that participate in global supply chains. Asian markets have been supported by better earnings growth than anticipated across the region, including internet and information technology companies, which accounted for a significant proportion of the MSCI Asia Ex-Japan’s returns in 2017. Rising regional demand and growing intra-regional trade has not only provided support for Asian companies’ income but also demonstrated their waning vulnerability in the event that the US should go ahead and erect new investment barriers or trade tariffs. This phenomenon is best demonstrated by the changes in Asian currency exchange rates, which have moved in sync across Asian neighbours regardless of their current account positions.

Economic data and reported earnings suggest that these factors will likely be carried over into 2018. Asia’s economic growth outlook remains well anchored by the region’s two largest economies, China and India, both of which have implemented structural reforms in recent years. We expect China’s economy to decelerate in 2018, primarily due to a slowdown in fixed-asset investments, reflecting Beijing’s efforts to prioritise domestic consumption and address excess capacity in older industries. India’s economy should offset China’s rebalancing exercise, as small and medium-sized enterprises recover from the impact of demonetisation and the implementation of the goods and services tax.

While the current cycle appears to be in its later stage, all major economies are expected to expand in 2018 which could extend this cycle, leading to a positive spillover and driving a subsequent increase in local capital investments. This would overlap with the continued expansion of intra-regional trade, evident both from a rise in value and from volume demand emanating from end users within Asia.

Global liquidity remains accommodative amid benign inflationary pressure. At its meeting in December, the Federal Reserve raised its main borrowing costs for the third time in 2017, signalling three additional hikes in 2018 alongside an incremental reduction of its balance sheet. The Federal Reserve’s liquidity withdrawal is essentially being offset by an ongoing quantitative easing exercise by the European Central Bank, which is likely to continue for most of the first half of 2018. Asian central banks have responded in tune to domestic factors rather than to the Federal Reserve, suggesting that a broad-based tightening cycle remains some time away.

We maintain a constructive outlook for Asia in 2018. A sudden surge in the US dollar’s strength or a more aggressive tone on interest rates from the Federal Reserve would create market headwinds given significant currency appreciation in Asia, but provides an attractive opportunity to accumulate the asset class. The traditional view that a stronger dollar against Asian currencies is detrimental to Asian economies holds less sway due to the proliferation of Chinese and regional technology companies delivering domestically driven earnings. There is also an evident decoupling between dollar appreciation and weaker oil prices as a result of better energy efficiency and technological advancements, which indirectly supports the quality of assets held by financial institutions.

Christopher Chu – Fund Manager, Asian equities – Union Bancaire Privée (UBP)