Hard Data Has Improved From A Year Ago!
Last year, we made our call on the Asia ex Japan markets, stating that they are at an inflexion point for valuation re-rating and earnings upgrades, and that Asian equity markets are poised for high returns by the end of 2018. Since then, a plethora of economic data has confirmed that economic momentum across Asia ex Japan has picked up, including industrial production as well as an acceleration in exports growth. The climb in exports volume have been driven by an ongoing recovery in the global semiconductor industry, benefiting Asian markets like South Korea, Taiwan, Thailand and Malaysia that export electronic goods.
Chart 1: Asia's Exports Have Picked Up!
On the other hand, domestic consumption across Asian countries have been slower in their improvement, but remain supported by a gradual amelioration in consumer sentiment. The pickup we see in economic hard data has transpired despite uncertainty stemming from a potential implementation of protectionist trade policies stemming out from the US or geopolitical tension on the Korean peninsula.
A look at several leading indicators on both a regional and single country basis suggests that the gains in hard economic data can continue, given the recovery in business sentiment among Asian corporations. Composite Purchasing Managers Indexes (PMI) in major Asian countries like China, Japan and India have been on an uptrend since 2H 2016, firmly in expansionary territory (readings are above 50.0). Breaking down the headline composite data, the gains are seen in both the manufacturing and services components of the PMIs.
Chart 2: Composite PMIs of Several Asian Countries Since June 2014
Chart 3: Asian Manufacturing PMIs On Steady Uptrend Since January 2016
With leading indicators generally painting a healthy outlook, we maintain our view that economic momentum across Asia will continue to accelerate, benefiting businesses and supporting the growth of corporate earnings.
Corporate Earnings Estimates Are Seeing Broad Upgrades!
With the macroeconomic backdrop improving, momentum has trickled into the earnings estimates of equity markets, especially those across the Asia ex Japan region. Chart 4 below shows the changes in revisions of consensus earnings estimates across both developed and emerging markets on a regional basis. While the global index, the MSCI AC World, has seen decent upgrades year-to-date, the emerging markets and Asia ex Japan space have seen the strongest upgrades to their consensus aggregate earnings growth, with the MSCI Emerging Markets Index seeing 2017’s and 2018’s earnings estimates bumped 9.7% and 8.4% higher respectively (as of 19 May 2017). Asian markets have seen aggregate estimates for both 2017’s and 2018’s earnings revised north of 11.0% year-to-date, beating the developed markets of Europe and the US.
Chart 4: Regional Markets' Earnings Estimates Revisions Year-To-Date
The stronger recovery in earnings growth expectations across Asian markets is seen in both cyclical sectors and defensive sectors, with the information technology (IT) enjoying the most upgrades. The year-to-date upgrades have been rather strong, and while it is possible that the momentum of these revisions are to moderate and slow down, we opine that continued and gradual upgrades could continue alongside an improving macroeconomic environment.
Chart 5: Asia Ex Japan Corporate Earnings Trend Since 2011
Based of the consensus numbers, Asia ex Japan equities are projected to grow earnings by 23.1% in 2017, before increasing by 10.3% next year. On the other hand, the global equity index (MSCI AC World) is projected to see its earnings grow by 14.9% this year before growing by 10.7% in 2018 (as of 22 May 2017).
Still Positive On Asia Ex Japan!
Despite the brilliant performance of the emerging market space and various Asian markets year-to-date (they have outperformed the developed markets), valuation multiples of their equity markets remain compelling relative to their developed counterparts as expectations of corporate earnings growth enjoy a recovery.
Chart 6: Valuation Multiples Of Regional Markets
As of 22 May 2017, the MSCI Asia ex Japan Index is trading at 13.4X and 12.1X 2017's and 2018's estimated earnings, which still represents a discount to its fair PE ratio of 14.0X. As a whole, emerging markets also trade at a discount to where we deemed them fair despite their strong outperformance relative to developed equity markets. If one were to compare the headline estimated PE ratio of the Asia ex Japan equity index against the MSCI World Index (which represents the developed markets), there is still a clear valuation disparity between the two indexes, with Asian markets at lower valuations and the developed markets index skewed by rather expensive valuation multiples of the US and European equity markets.
Investors seeking higher equity market returns should remain overweight Asia ex Japan as the region still offers a higher upside potential! Investors preferring diversified exposure can opt for Asian equity funds or region specific funds like Greater China or South East Asian funds to obtain your ideal Asian geographic exposure. Alternatively, single country equity funds are also an option for investors who want dedicated exposure to a single, desired Asian market. Check out some of our recent articles (here, here and here) where we highlighted equity funds available on FSMOne to capture the investment opportunities across the region!
If you are unsure where to begin in your fund picking, our Recommended Funds list would be a great place to start! However, if you are interested to invest but do not want the hassle of doing it all by yourself, why not consider our newly-launched service: FSM MAPS? Let our portfolio management team devise your asset allocation, keep track of financial market developments and pick the appropriate and optimal products for your portfolio! You may start by doing up a questionnaire!
For further enquiries, kindly contact our warm and friendly investment advisory team!
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