Macro Research

iFAST 2020 Equity Strategy: Asia the epicentre of market upswing

2019 was a tumultuous year where heightened political uncertainties and macro risks dominated the investment landscape. Moving into 2020, we foresee such headwinds receding while tailwinds emerge for equities. Here’s what we think investors should position their portfolios moving forward.

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  • Published on 21 Dec 2019

iFAST 2020 Equity Strategy: Asia the epicentre of market upswing | Open a FREE FSMOne account and manage all your investments conveniently in ONE place

Summary

Given the macro backdrop and our assessment of risks in 2020, we remain overweight equities vis-à-vis fixed income. Our strategic allocation is heavily motivated by:
Improved macro outlook in 2020 and low interest rate environment which supports equity markets.
Major catalysts emerging for a rebound in Asian equities next year.
Global investors still risk adverse, leaving room for equity markets to run in 2020.

Moving into 2020, we favour the following markets:
China (Very Attractive) – Economy expected to stabilise. Cheap valuations supported by one of the highest earnings growth in Asia. Profit outlook remains bright for Chinese companies. Very attractive upside for A and H-shares.

Hong Kong (Very Attractive) – Economy remains supported with a possible recovery in 2H 2020. Valuations are at very attractive level. Equities supported by positive trade developments and China’s growth outlook. Risk-reward has skewed towards the upside.

South Korea (Very Attractive) - Both economy and stock market benefit tremendously from the semiconductor up-cycle. One of the highest earnings growth market in 2020 with potential for further upwards revision in earnings. Attractive upside.

Taiwan (Very Attractive) - Both economy and stock market benefit tremendously from the semiconductor up-cycle. Longer-term benefit from value chain relocation in Taiwan due to trade uncertainty to benefit companies such as TSMC which are global leaders in respective sectors.

Singapore (Very Attractive) - Potential export-led economic growth rebound in 2020. Benefits significantly from recovery of electronics sector. Equity market offers high dividend yield in a low-yield environment. Cheap valuations promise attractive upside

Japan (Attractive) – Benefits from recovery of electronics sector. Companies have improved their corporate fundamentals, are more profitable and use capital more effectively. Valuations remain cheap. Attractive Upside.

Indonesia (Attractive) - Multiple growth boosters emerged heading into 2020 and outlook appears brighter. Rosy long-term growth outlook, supported by population dividend. Earnings expected to be upgrade with strong double-digit growth in 2020.

Russia (Attractive) – Economy expected to accelerate in 2020. Stability and improved outlook for oil prices is a huge boon for Russian equities and sets the market up for potential earnings upgrade. Dividend yield estimates in 2020 remain significantly high at 7.5%.

Remain overweight equities over fixed income


Faced with a confluence of heightened political and macro risks in 2019, it is easy for investors to be shaken out by the grim prospects of a global growth slowdown. Yet, entering 2020, we expect a major turnaround in Asian markets, underpinned by a potential economic recovery. Given the macro backdrop and our assessment of risks in 2020, we remain overweight equities vis-à-vis fixed income. Our strategic allocation to overweight equities is heavily motivated by the following factors.

Our team foresees an improved global growth prospects in 2020 and expects growth to remain resilient, picking up next year. We anticipate further fiscal and monetary support in 2020 while holding the view that global interest rates will remain relatively low. Underpinned by our macro outlook next year, global equities as we projected will continue to offer attractive upside potential (Table 1 from our iFAST 2020 Outlook: The dawn of a major upswing. Time to jump aboard!) of while fixed income remains mired in a low-yield environment.

As discussed in our iFAST 2020 Outlook: The dawn of a major upswing. Time to jump aboard!, we expect major catalysts for a rebound in Asian markets and economies next year. As such, our team believes the rebound in Asian economies will drive equity returns next year and sees a potential rally in Asian and Emerging Markets (EM) equities. Conversely, we do not foresee significant drivers for bonds in 2020 at the current juncture. It is this difference that compels us to favour equity over fixed income.

From a sentiment perspective, we find global investors to be still on the cautious side. Investor sentiment largely soured in 2019 as the number of bullish investors dipped while bearish and neutral investors surged (chart 1). With recent positive developments in the trade dispute, the number of bullish investors grew but remained notably low on a historical basis. The total outflow from global equities has also reversed, where outflows have decelerated sharply over past month, pointing to a reversal in sentiments towards optimism (chart 2).  All things considered, we believe many investors are still holding back (money market funds spiked to recent year high after trade war commenced), therefore leaving ample cash to deploy. In such ans environment, we still see room for equity markets to run in 2020.

Chart 1: Number of Bullish investors have risen lately. Most remained neutral however


Chart 2: Equity markets has seen lesser outflows in recent months, denoting shifting sentiments
 

China A & H Shares (4.0 Stars/4.5 Stars “Very Attractive”)

Our team expects China’s GDP growth to decelerate gradually, likely falling to below 6% in 2020.  However, we do not find it alarming as is it largely due to the maturing of the Chinese economy, much like the Developed Markets (DMs). On the flip side, we remain positive that growth in 2020 will be cushioned by the following factors which should strengthened throughout next year: 
(i) Robust domestic demand due to China’s rebalancing effort towards consumption-driven growth and its burgeoning middle class. 
(ii) Stability and likely improvement in credit conditions. 
(iii) Greater countercyclical efforts by policymakers. 
(iv) Improvement in fixed asset investment (FAI), a growth booster, led by infrastructure FAI. 

Moreover, external weakness caused by trade dispute, a macro headwind in 2019, is expected to alleviate in the coming year. All in all, China’s economic growth is expected to slow, but is likely to be gradual and non-threatening to Asia’s economic recovery. 

Earnings of China A-share equities are projected to grow by double digits in 2020, one of the highest in Asia. With an improved macro outlook compared to 2019 and a ‘phase 1’ deal, we expect earnings growth estimates to improve for Chinese equities in 2020. We see an upside in earnings revisions in 2020 as more countercyclical support and improvement in credit conditions can trigger these revisions. The improved earnings prospect heading into 2020 supports the cheap valuations in both A and H shares. We favour Chinese equities overall with the A and H-shares projected to have an upside potential of 28% and 54% respectively. Investors looking for a greater valuation discount can consider H-shares.

Key risks to the Chinese equities in 2020 include re-escalation of trade dispute, prolonged protests in Hong Kong affecting the H-shares, and China’s economy slowing more than expected.

Charts 3: Valuations for China A-shares equities remain attractive…


Charts 4: …Valuations for China H-shares equities even more attractive


Chart 5: CSI 300 index price and EPS


CSI 300 Index (China A-shares)

FY2018

FY2019

FY2020

FY2021

PE Ratio

14.1

13.0

11.4

10.1

Expected Earnings Growth YoY

8.0%

8.9%

13.8%

12.4%

Earnings Per Share (EPS)

281

306

348

391

Projected Fair Price (Based on Fair PE Ratio of 13.0X)

-

-

 -

5,087

Potential Upside from Today (%)

-

-

-

28%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.


Chart 6: HSML 100 index price and EPS

 

HSML100 Index (China H-shares)

FY2018

FY2019

FY2020

FY2021

PE Ratio (X)

8.8

9.2

8.5

7.8

Expected Earnings Growth YoY

7.1%

4.8%

7.3%

9.9%

Earnings Per Share (EPS)

860

901

967

1063

Projected Fair Price
(Based on Fair PE Ratio of 12.0X)

-

-

-

12,752

Potential Upside (%) from Today

-

-

-

54%

   

Hong Kong (4.5 Stars “Very Attractive”)

Trade uncertainties have weakened Hong Kong’s external sectors and have gradually spilled over to the private sector. Consumption and investments have also moderated over recent quarters as political unrest continues. The culmination of factors have weighed growth down across recent few quarters. Moving into 2020, we expect weakness in the external fronts to alleviate after the ‘phase 1’ trade deal while also benefiting from Asia’s potential economic recovery. Monetary easing and fiscal stimulus has picked up in recent quarters, which provide a boost to growth. Overall, downwards pressure on consumption and investments will remain subdued as long as political unrest remains. However, the progress in trade developments and greater policy supports will keep Hong Kong’s growth supported in 2020, with a possible recovery in the second half. 

Corporate earnings have seen substantial negative revisions in 2019 pricing in negatives surrounding the political unrest and soft macro conditions, leaving limited room for further downgrades. With a positive growth outlook for Asia, we believe earnings may recover as many corporates have revenue exposure to the region. Valuations have been beaten down (near its historical low) and remain at very attractive level. Moving into 2020, we expect equities to be supported by positive progress in trade developments and a rosier growth outlook for China. Overall, risk-reward for HK equities is skewed towards the upside and we see upside potential of 30% by end-2021.

Key risks to Hong Kong equities in 2020 includes re-escalation of trade dispute, prolong political unrest and China’s economy slowing more than expected.

Charts 7: Valuations trading near 1 standard deviation below historical mean

 

Chart 8: HSI index price and EPS

 

HSI Index (Hong Kong)

FY2018

FY2019

FY2020

FY2021

PE Ratio

10.8

10.5

10.0

9.2

Expected Earnings Growth YoY

6.1%

3.5%

5.2%

7.9%

Earnings Per Share (EPS)

2553

2643

2781

3000

Projected Fair Price (Based on Fair PE Ratio of 12.0X)

-

-

 -

36,000

Potential Upside from Today (%)

-

-

-

30%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.



S. Korea (4.5 Stars “Very Attractive”)

Key headwinds to growth for S. Korea such as the trade dispute and tension with Japan have dissipated moving into 2020. The improvement in global trade and semiconductor upcycle improves  S. Korea’s growth prospect in 2020 given its global cyclical sensitivity. As such, we are of the view that S. Korea’s economic weakness has likely bottomed. On top of a resilient domestic demand, we expect the external sectors such as trade, manufacturing and industrial to rebound in 2020, driving economic growth. Policy support is strong in S. Korea as interest rates are slashed to historical low in 2019, while 2020 will see its biggest stimulus plan since the GFC. Overall, we see strong growth tailwinds for S. Korea in 2020 and expect the economy to improve after bottoming this year.

S. Korea’s equity market also has an outsized exposure to global electronics (IT sector makes up close to 40% of KOSPI index). This makes the global semiconductor upcycle a major catalyst for S. Korea’s equities  and earnings in 2020. A look back in history suggests analysts have been heavy-handed in earnings revision and thus, earnings estimates were slashed heavily in 2019. We expect earnings to be upgrade significantly in 2020 once semiconductor upcycle is in full swing. Earnings growth estimates for 2020 remain one of the strongest in the world, thereby supporting  modestly expensive valuations. We continue to favour S. Korean equities and project an upside potential of 30% by end-2021. 

Key risks to the S. Korean equities in 2020 includes re-escalation of trade dispute, resurgence of US-Sino dispute on electronics/ IT, and further tension with Japan.

Chart 9: Earnings growth expected to rebound strongly in 2020  


Chart 10: KOSPI index price and EPS

 

KOSPI Index (S. Korea)

FY2018

FY2019

FY2020

FY2021

PE Ratio

9.3

15.3

11.6

9.6

Expected Earnings Growth YoY

-1.2%

-39.6%

31.4%

21.0%

Earnings Per Share (EPS)

234

142

187

226

Projected Fair Price (Based on Fair PE Ratio of 12.5X)

-

-

 -

2,821

Potential Upside from Today (%)

-

-

-

30%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.


Taiwan (4.0 Stars “Very Attractive”)

Moving into 2020, we see key pillars of support for Taiwan’s economy re-emerging. Taiwan’s trade reliant economy will benefit significantly from the ‘phase 1’ trade deal which will swing Taiwan’s export momentum positive. Taiwan is also a key beneficiary of the prolong trade dispute, as manufacturers have moved their supply chain to Taiwan throughout the last 1.5 years. The relocation is a mid to long-term boon for Taiwan’s economy due to improved business activities, CAPEX and output. Lastly, with the semiconductor cycle expected to go into full swing in 2020, Taiwan’s economy (with a heavy concentration on semiconductor/ electronics) will undoubtedly be uplifted via export and CAPEX. Overall, macro headwinds has been significantly reduced while key pillars of growth emerges, we are positive on Taiwan’s growth outlook and expects a rebound in its economy.

Taiwan’s equity market’s has an outsize exposure to global electronics (IT sector around 45% of  TWSE) and semiconductor (around 33% of TWSE index). With the global semiconductor cycle expected to swing up in 2020 and sales expected to grow by double-digit, we foresee a margin expansion for related companies in Taiwan. Sales and earnings on a TTM basis have spiked in the latest fiscal quarter and we anticipate earnings to further grow, underpinned improved sales. The recent reversal of earnings downgrade also suggests that pessimism on profit outlook has dissipated moving into 2020. While valuations have ran higher in recent months, we believe it is supported by stronger earnings growth. We still favour Taiwan equities and project an upside potential of 22% by end-2021.

Key risks to the Taiwan equities in 2020 includes re-escalation of trade dispute, resurgence of US-Sino dispute on electronics/ IT, and competition from China.

Chart 11: Semiconductor sales a significant driver for TWSE Index's EPS growth

 

Chart 12: TWSE index price and EPS


TWSE Index (Taiwan)

FY2018

FY2019

FY2020

FY2021

PE Ratio

15.7

18.2

16.2

14.7

Expected Earnings Growth YoY

7.4%

-13.9%

12.5%

10.2%

Earnings Per Share (EPS)

760

654

736

812

Projected Fair Price (Based on expected PE Ratio of 18.0X)

-

-

 -

14,609

Potential Upside from Today (%)

-

-

-

22%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.


Singapore (4.0 Stars “Very Attractive”)

Singapore economy has been battered down heavily on the external fronts in 2019, as dragged down by the moderating global electronics industry. Moving into 2020, our team expect export growth to rebound as driven by two cardinal catalysts (i) global semiconductor upcycle and (ii) trade re-direction into Asia. We expect the revitalisation in exports to swing economic momentum positively and thereby uplifting domestic demand. Improved external and domestic demand will underpin economic growth in 2020. Therefore, we foresee growth for trade-reliant Singapore to improve moderately in 2020, rebounding from 1Q 2019’s low.

Singapore equities are cheap at the current juncture, trading around price-earnings ratio of one standard deviation below its ten-year average. Valuations are very attractive amongst markets we cover. With a rosier macro outlook, we also expect earnings prospects to improve in 2020. In a low yield environment, the dividend story for Singapore equities grows increasingly more attractive. The high dividend yield provides an appealing additional return. We see upside potential of 26% by end-2021 for Singapore equities.

Key risks to the Singapore equities in 2020 includes re-escalation of trade dispute, muted investor’s sentiment and China’s economy slowing more than expected.

Chart 13: Manufacturing and export indicators bottomed and showed signs of reversal

 

Chart 14: Singapore index price and EPS

 

STI Index (Singapore)

FY2018

FY2019

FY2020

FY2021

PE Ratio

13.2

13.1

12.5

11.9

Expected Earnings Growth YoY

12.1%

0.7%

4.4%

4.9%

Earnings Per Share (EPS)

244

246

257

269

Projected Fair Price (Based on Fair PE Ratio of 15.0)

-

-

 -

4,038

Potential Upside from Today (%)

-

-

-

26%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.



Japan (3.5 Stars “Attractive”)

Economic data for Japan released in the second half of this year have been surprising positively. Also, various positive catalysts – Asian export recovery, global semiconductor upcycle and positive progress for trade talks – for rebound in economic condition are emerging. The recently announced expansionary fiscal budget will further lend support to growth. We believe these positive growth factors should outweigh the drag by October 2018’s consumption tax. Current economic growth remains fragile due to Japan’s exposure to trade, but its prospect in 2020 is becoming rosier.

We favour Japanese equities due to improving corporate fundamentals (margins near cycle high, debt levels sunk, ROE improved and closed the gap with other DMs). Not only are they more profitable but Japanese equities also use capital more effectively (Higher dividend payouts, more M&A activities and shares buybacks). Valuations remained cheap and we see upside potential of 14% by end-2021. The upside potential maybe further extended should the global flight to value stocks (seen in September 2020) resume.

Key risks to the Japanese equities in 2020 includes re-escalation of trade dispute, impact from consumption tax and China’s economy slowing more than expected. 

Chart 15: Share buybacks reached post-GFC high in 2018


Chart 16: Companies have been and are expected to pay out more dividend

 

Chart 17: NKY index price and EPS


 

NKY Index (Japan)

FY2018

FY2019

FY2020

FY2021

PE Ratio

17.3

18.4

17.2

15.7

Expected Earnings Growth YoY

16.0%

-5.9%

7.3%

9.1%

Earnings Per Share (EPS)

1386

1304

1399

1527

Projected Fair Price (Based on Fair PE Ratio of 18.0X)

-

-

 -

27,488

Potential Upside from Today (%)

-

-

-

14%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.


(Related Article – Japan: Quality at a Bargain)  

Indonesia (3.5 Stars “Attractive”)

Private consumption has been a prime growth pillar for Indonesia’s economy. We expect it to hold in the coming year despite softening marginally in recent quarters. The growth booster in 2020 will come from an (i) export rebound and (ii) strong policy support. Our team expects a recovery in Indonesia’s export as supported by rising commodity prices and reinforced by the bottoming of PMI and industrial production growth readings. President Jokowi’s re-election in 2019 promised greater infrastructure spending through 2020 state budget, which has the rack record of lifting the econbomy. Furthermore, Bank Indonesia (central bank) has aggressively slashed rates four times and reduced reserve requirement for local banks in 2019 to stimulate growth. With multiple growth boosters going into 2020, Indonesia's growth outlook appears brighter.
 
Earnings estimates for Indonesian equities has been downgraded heftily in 2019. However, we believe downgrades have likely bottomed as negative earnings surprise has shrank in recent quarters while aggregate sales and earnings (from a TTM basis) has improved. Moving into 2020, the positive macro backdrop will act as tailwinds for the cyclical companies and sectors, which were battered heftily in recent quarters, and they will drive the upwards revision collectively. Valuations are slightly expensive but earnings growth remains in double-digits. We see upside potential of 19% by end-2021.

Key risks to the Indonesia equities in 2020 includes weaker-than-expected private consumption, weakness in commodity prices and poor EM sentiments. 

Chart 18: Growth supported by consumption while exports have improved

 

Chart 19: JCI index price and EPS

 

JCI Index (Indonesia)

FY2018

FY2019

FY2020

FY2021

PE Ratio

16.7

16.2

14.5

12.6

Expected Earnings Growth YoY

12.3%

2.7%

12.1%

15.0%

Earnings Per Share (EPS)

372

382

429

493

Projected Fair Price (Based on Fair PE Ratio of 15.0X)

-

-

 -

7,397

Potential Upside from Today (%)

-

-

-

19%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.


Russia (3.5 Stars “Attractive”)

Russia’s growth stumbled in 1Q 2019 as the implemented value-added tax (VAT) dragged down consumption, nonetheless, growth recovered steadily in the ensuing quarters. We expect domestic demand to extend its recovery into 2020 as consumers shake off the impact of the VAT. The divergence between Russia’s manufacturing and services PMI suggests that external weakness is still weighing on Russia’s economy, given its trade exposure to China and Germany (Largest two trading partners). However, our team expects demand from the two aforementioned economies to recover in 2020, thereby mending Russia’s external weakness. Aggressive monetary policy and a pick up in government expenditure (which has been behind schedule) will provide additional boost to growth. Overall, we expect Russia’s economy to re-accelerate in 2020.

Oil prices remains tilted to the upside in 2020 as (i) it is supported by the positive progress of US-Sino trade developments, which is supportive of oil demand and (ii) expected deeper oil production cuts in March 2020, on the supply side. This is a boon for Russian equities due to its high exposure to the energy sector (almost 50% of RTS index). A strong macro backdrop accompanied by higher commodity prices will improve earnings prospects in 2020, setting up for potential upgrades and higher growth estimates. Dividend yield estimates remain significantly higher than peers at 7.5% while valuations are still fair. Moreover, key risks from sanctions have declined notably in 2019. We see upside potential of 15% by end-2021.

Key risks to the Russia equities in 2020 include unexpected flagging demand from Germany and China and weakness in commodity prices (particularly oil prices).

Chart 20: Russian equities boasts high dividend yield

 

Chart 21: RTS index price and EPS



RTS Index (Russia)

FY2018

FY2019

FY2020

FY2021

PE Ratio

7.2

6.9

6.5

6.1

Expected Earnings Growth YoY

28.0%

3.9%

6.9%

6.2%

Earnings Per Share (EPS)

209

217

232

247

Projected Fair Price (Based on Fair PE Ratio of 7.0X)

-

-

 -

1,726

Potential Upside from Today (%)

-

-

-

15%

Source: Bloomberg, iFAST estimates. Data as of Dec 2019.


Table 1: Products that investors can consider to gain exposure to the individual markets

The Research Team is part of iFAST Financial Pte Ltd. 

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