Asian equities were out of vogue last year – developed markets were the darlings of investor sentiment.
Partly this was attributable to the infamous ‘taper tantrum’. But it also reflected a deeper and longer trend: a growing recognition of the complacency that had seeped into corporate Asia. After all, with capital flowing freely and consistently into the region, where was the incentive to make tough but necessary business decisions?
Things have turned around somewhat this year, though, and equity markets across Asia have enjoyed a small comeback.
Despite continuing uncertainty about US tapering – namely the potential for a hike in interest rates in the autumn – Asian equities have continued to benefit from the assurance of loose monetary policy and positive political developments. This follows a difficult start to the year, as the hangover from concerns about withdrawal of monetary stimulus in the US caused outflows from emerging market equities.
Now, however, we are seeing quite the reverse of last year, with results being led by the Association of Southeast Asian Nations markets and India.
The Asean story has been an interesting one so far this year. Thailand’s stock market has been among the outperformers for the region – remarkable considering the recent military coup.
But for the first time in more than a year, Thai consumer confidence improved as the nationwide curfew was lifted and the interim military rulers began approving stalled investment and infrastructure projects. This should help reinvigorate growth. Naturally, there are still structural issues in much of the Asean area and these will exist for a long time, but a lot can be said for the rebound of this sub-region.
There have been other political developments throughout the region that have produced favourable conditions for financial markets. The presidential victory of investor favourite Joko Widodo in Indonesia has been positive for investor sentiment, sending stocks higher.
But investors should continue to keep their eyes on the situation as a likely challenge by his opponent, Prabowo Subianto, could lead to some uncertainty for the market.
Elsewhere in Asia, the new pro-business president of India, Narendra Modi, has brought a more transparent, leaner government with faster decision-making capabilities. The hope is that Modi’s rule translates to business confidence and the resumption of Capex investment, although investors should remain cautious of ‘Modi euphoria’. India is still experiencing slowing growth and high inflation and therefore the hope is that a government consensus will be struck to change legislation.
Contrary to last year, though, India is now the market darling. Its narrowing fiscal deficit, at present 4.1 per cent, points to increasing financial health in the country and if Modi can deliver on his infrastructure spending and business-friendly proposals, the outlook for India is encouraging.
Of course, China is a constant focal point and a legitimate concern. China continues to provide a credit risk for the region. With growth further decreasing to approximately 7 per cent recently, the fear is that, as China’s economy slows, the greater region’s growth will mirror this.
Indeed, the Chinese stockmarket is a minefield for shareholders and the opportunity for corruption is rife. There is hope, however, that corporate governance in China will improve through its new, ambitious reform agenda. President Xi Jinping’s anti-corruption campaign is set to be one of the largest in contemporary China and has the potential to expand significantly over the coming year. However, the property bubble in China persists.
Without wishing to ignore last year, investors should be cautiously optimistic on the fortunes of Asian equities at the moment. Bouts of volatility will no doubt surface and a sustained Chinese slowdown and territorial disputes between China and its neighbours could also cloud the region’s outlook.
Against this backdrop, a premature tightening of policy, particularly by the US Federal Reserve, would unsettle markets, as would a bigger than expected slowdown in Chinese growth. But Beijing has deep enough pockets to prevent sectoral problems from infecting the wider economy.
Despite these uncertainties we are upbeat about Asia. Fundamentally, the region is healthy and value can be found – so long as investors take a long-term view and undertake the appropriate research.
Hugh Young is managing director of Aberdeen Asset Management