- Growth in Asian economies have been hampered in 2019 as headwinds dragged on exports. This arose due to a combination of China’s demand slowdown, semiconductor downcycle and trade war uncertainties.
- We believe a rebound in Asian exports is imminent due to 2 main factors: (i)
Cyclical upswing in global semiconductor
industry and (ii) Re-direction
of new orders into existing production capacity in other Asian economies after the one-off trade war shock.
-
We expect a robust uptrend in Asian exports as seen from our projections. The export-heavy markets such as Singapore, South Korea, Taiwan, Thailand and Malaysia will see a rebound in exports over the coming quarters leading to a recovery in economic growth. This will drive corporate earnings higher for Asian equities.
Valuations of Asia region (MSCI Asia ex Japan) remains cheap while supported by robust double-digit earnings growth. The upside potentials of Asia ex-Japan for FY2020 and 2021 remains very attractive at 12% and 27% respectively.
- Overall, we maintain our star ratings of 4.5 stars “Very Attractive” for Asia ex-Japan market.
What has happened to Asian exports?
Asian economies have been hammered in 2019 as headwinds from multiple fronts colluded to dragged growth down. Externally exposed sectors such as exports were the first to get battered down. Given the significance of exports to most Asian economies, economic growth within the region soon stumbled and declined (Chart 1 and table 1).
We believe the current weakness in Asian exports is the result of a confluence of factors. The leading factors are (i) uncertainties spawned from the US-Sino trade dispute, which caused a deterioration of investors’ and businesses’ confidence that dragged down business activities and hence, import demand. (ii) Global semiconductor cyclical downturn which several Asian economies are highly exposed to. Electronic exports account for a substantial portion of GDP in various economies within the regional, like Singapore and Taiwan (Chart 2). (iii) China’s domestic hiccups such as the rebalancing and deleveraging campaigns which culminated in a slowing demand growth. Given China’s growing significance as the largest trade partner of Asian economy, the decline in regional trade and demand has been exacerbated.
Chart 1: GDP growth in Asian economies have been dragged down across 2019
Table 1: Quarterly GDP growth across Asian economies dipped in 2019, but slated to rebound next year.
Chart 2: Electronic exports account for a substantial portion of GDP in Asian economies
Why we think a rebound in regional trade is imminent?
We believe a rebound in Asian exports is imminent due to two main factors. Firstly, it is the cyclical upswing in global semiconductor industry which we expect to drive up trade activities. Global semiconductor sales, which bottomed out in March 2019, is now on an uptrend and we expect double-digit growth in the coming quarters. This is suggested by TSMC’s plan to increase capacity which signals confident of demand returning. In the longer-term, the rise of new technological advancements will also support semiconductor demand.
Secondly, we believe Asian economies are key beneficiaries of the US-China trade conflict. These economies will benefit from the re-direction in new orders into existing production capacity, particularly for markets such as Taiwan/South Korea/Singapore. This is done in order to side-step the impact of tariff and future uncertainties on Chinese goods.
Cyclical upswing in global semiconductor industry to drive trade activities
At current juncture, we are observing several encouraging signs indicating that a recovery is underway. Global semiconductor sales which bottomed out in March 2019 (Chart 3) is now on an uptrend, with the latest monthly sales numbers coming in at USD 34.2 billion for August 2019, as compared to USD 32.2 billion five months before.
Favourable shift in supply-demand dynamics within the industry – inventory drawdowns and improving demand environment (led by an organic growth in demand from cloud service providers), can be observed from key markets.
One prime example is TSMC, the world’s largest foundry and widely regarded as the industry’s bellwether stock. Its monthly revenue and CAPEX plans, which are key indicators of the industry's health, have improved. Recently reported results were strong which is a robust tell-tale sign of an impending recovery in the semiconductor cycle. Moreover, TSMC's plan to increase capacity is also a sign that the company is confident of demand returning in the near future.
In the longer-term, as we usher in the ‘Data’ era, with the rise autonomous vehicles, big data analytics and 5G wireless communication, we believe there could be a long-term structural uplift in demand. Therefore, better-than-expected global roll-out of 5G telecommunication equipment and infrastructure can spur a speedier recovery in semiconductor cycle.
Chart 3: Semiconductor's downcycle contributed to Asian export decline
Potential Beneficiaries of the US-China trade conflict
The economic deceleration reflects the gloomy outlook across Asia as exports languish amid a global contraction in trade. Unsurprisingly, some of the economies most reliant on international trade – Singapore, South Korea and Taiwan – have been among the hardest hit.
Paradoxically, we believe these economies are in the best-positioned to benefit from the US-China trade conflict, especially when it comes to the triangulation of trades between their two major trading partners, China and US. Aside from the one-off trade war shock that brought exports numbers down, we expect new orders to be progressively re-directed into existing production capacity in these Asian economies, as a bid to side-step impact of tariff on Chinese goods.
Supply chain relocation into emerging Southeast Asian countries like Thailand, Malaysia and Vietnam will also lend support to the export rebound. However, this is a mid to long-term secular trend, which is accelerated by the trade conflict. A combination of pull-push factors also contributed to such a paradigm shift - China’s rising labour cost, reluctance to take on low-paying factory jobs, desire to shift up the value chain and declining working population, have necessitated the shift in manufacturing production towards these economies.
How we think the rebound in Asian export numbers will look like into the next few quarters?
In our assessment, the aforementioned drivers will carry Asian exports north in the coming quarters. We expect a robust uptrend in Asian exports and one which extends at least until 2Q 2020. As projected in charts 4 to 5, for the five Asian economies, we expect exports to bottom around 2Q 2019 to 3Q 2019, and begin its recovery from then on out.
In the mid-term, we believe the relocation of supply chains and the additional influx of foreign investments to Asia (i.e. MNCs building regional offices, expansion of current businesses etc.) will generate an economic boost. This is compounded by the revitalisation of trade activities which will also uplift business activities, particularly manufacturing and industrial production. Such an economic boost in Asia, as we believe, will be driven by greater consumer spending as a result of larger wage growth and job creation. Consumption will be an increasingly important macro driver for the Asian growth engine moving forward, as most economies are progressively becoming more consumption-driven.
Overall, the Asian export rebound will likely engender a resuscitation of economic growth and business confidence in our view. As the sales and investment environment improves with economic growth, we foresee a lift in corporate earnings growth for the coming years, as observed historically.
Chart 4: Malaysia’s quarterly export growth
Chart 5: Thailand’s quarterly export growth
Chart 6: Singapore’s quarterly export growth
Chart 7: South Korea’s quarterly export growth
Chart 8: Taiwan’s quarterly export growth
Risks/Potential Headwinds to Asian Export Recovery
The strength of the Yuan will be a determining factor for China’s import demand. With the weakening of the Yuan against the Greenback since April 2018, imports have turn relatively costly for Chinese consumers and businesses. While a further slide in the Yuan’s value will likely hamper Asian export recovery, we expect the possibility of such occurrence to be relatively low.
This is underpinned by factors such as (i) possible currency pact/ the desire to not be named currency manipulator by the US (which may once again foil trade progress), capital inflow due to (ii) rising investors’ confidence in China (after uncertainty dissolves with trade progress) and (iii) an improvement in the Chinese economy.
The other key headwind to Asian export recovery is the potential breakdown in trade talks and the re-escalation in tariffs. This will certainly stifled demand globally and in particular, China and US (two largest import partners for Asian economies), which will in turn foil export recovery plans.
Nonetheless, not all Asian economies suffers the wrath of the trade conflict and, hence, we do not expect growth in Asia to fall off the cliff. Many ASEAN economies have, and still, benefit from other areas such as the supply chain relocation, substitution of exports and inflow in FDI.
Attractive Valuation and Earnings Growth
Valuations of Asia region (MSCI Asia ex Japan) remains cheap while supported by robust double-digit earnings growth. Using our fair PE ratio of 14.5X on projected EPS of MSCI Asia ex-Japan index, we derive attractive potential upsides of 12% and 27% for FY2020 and FY2021.
In the short-term, we expect that positive catalysts like semiconductor upcycle (which in turn drive rebound in Asian export) and a positive resolution/compromise on the US-China trade wars to lift PE valuation towards our fair PE value of 14.5X for MSCI Asia ex-Japan index.
We expect an organic expansion in PE valuation of Asia ex-Japan index in the mid to long-term, arising from factors like:
(i) Structural macro trends (urbanisation, rural- urban migration, rising middle class), (ii) China's rising importance and its composition in the index and (iii) projected above-average economic growth (CAGR) of emerging Asia vis-à-vis against other regions.
Overall, we maintain our star ratings of 4.5 stars “Very Attractive” for Asia ex-Japan market. We think investors should seize the opportunity to accumulate more exposure to the Asia ex-Japan market, to take advantage of its cheap valuation while positioning for a robust recovery in export activities within the Asian region.
For investors seeking an actively-managed fund for exposure to the Asian market can consider the Schroder Asian Growth Dis SGD. On the other hand, investors who prefer a passive, lower-cost ETF option can consider the iShares Core MSCI AC Asia ex Japan Index ETF.
Table 2: Asia ex-Japan index offer decent upside potentials, thanks to its reasonable valuation and robust earnings growth.
| MSCI Asia ex-Japan Index | FY2018 | FY2019 | FY2020 | FY2021 |
| PE Ratio (X) | 13.5 | 14.7 | 12.9 | 11.4 |
| Expected Earnings Growth YoY | 2.6% | -8.4% | 13.9% | 13.5% |
| Earnings Per Share (EPS) | 47.3 | 43.3 | 49.4 | 56.0 |
| Projected Fair Price (based on Fair PE of 14.5X) | - | - | 716 | 812 |
| Potential Upside% from Today | - | - | 12% | 27% |
| Source: Bloomberg, iFAST estimates. Data as of Oct 2019. | ||||
Chart 9: Asia ex-Japan index current trades below our fair PE valuation
Chart 10: MSCI Asia ex-Japan index and its underlying earnings trend upwards across the longer term
The Research Team is part of iFAST Financial Pte Ltd.