What’s the market not seeing?
Catalysts for improvement
We believe there are some interesting market catalysts appearing for 2020 – most notably a bottoming of earnings expectations, coinciding with basing out of global PMI data. Valuations, especially asset-based metrics, are supportive.
The ratio of earnings upgrades to downgrades in Asia has been exhibiting signs of stabilisation and may have already bottomed – any modest improvement in the underlying business environment will filter swiftly into this ratio and drive stock prices higher.
Several factors are causing this stabilisation and could act as potential catalysts for more sustained improvement:
Any modest improvement in the underlying business environment will filter swiftly into this ratio and drive stock prices higher.
- Co-ordinated monetary policy relaxation within the region and globally, combined with increasing adoption of more supportive fiscal policy measures;
- The US dollar has strengthened steadily since the end of quarter one 2018, into a deceleration of global economic growth – this is typically not supportive of Asian stock prices, so a dissipation of the dollar appreciation impetus would likely be a positive for Asian stocks.
- Stable or lower energy prices – strong energy prices are a tax on growth for Asia given that most countries in the region are net importers.
- Easing of trade tensions between the US and China – tensions between these two countries will be a persistent feature for many years to come; however, a workable trade agreement, including a de-escalation of the tariff regime, would be an obvious positive for the business environment.
What’s your focus in 2020?
Our focus remains constant: to maintain a portfolio of shares in Asian businesses that have the potential to grow with the region while delivering cash flow returns that are superior to those more generally available in the market. However, as keen observers of the progress within Asia of what we might call ‘institutional reform’, our attention in 2020 and beyond will undoubtedly be drawn to policies in the region’s two economic giants:
India is introducing far-reach labour reform measures, which will be a necessary condition for India’s emergence as a regional manufacturing powerhouse. Enactment of these policies is not guaranteed, but they could be attractive for global manufacturers as well as reducing costs for local manufacturers and creating the right incentives for smaller companies to scale up – all of which would enable more workers to enter the formal economy.
While very much work in progress, China is implementing corporate bankruptcy policies that would be very recognisable to western investors. This is important as it will help this huge economy navigate to a lower, but higher-quality growth trajectory and lead to greater economic efficiency. The system needs to continue to evolve and improve (for instance, social policy inclinations mean that there is still a tendency to favour shareholders over debtholders); however, China’s approach to corporate bankruptcy is professionalising rapidly. This can only be a good thing for the economy and its capacity to absorb and work through corporate failures, rather than create an estate of zombie companies that tie-up capital and hamper growth.
What’s the outlook for Asia?
Structural growth dynamics
There are some powerful structural growth dynamics which underpin the case for a long-term allocation to this exciting region.
There are some powerful structural growth dynamics which underpin the case for a long-term allocation to this exciting region. These will support strong economic growth for many years to come. In particular, we would highlight:
- Asian consumption spending – the expansion of the middle class in Asia, driven by population growth and rising disposable income, is a key multi-year growth driver
The coming middle-class population explosion
- Infrastructure investment – Asia is underspending here due to the heavy reliance on government funding but increased private sector participation will drive investment in climate mitigation, water and waste management, transportation, communication and power generation
- Trade – Asia’s largest trading partner is now itself; trade barriers have come down within the region, spurring growth and investment
- Innovation – Asia now spends more money on R&D than any other region of the world; vital for the creation of intellectual property and as a future economic growth
Regulatory information and risk warnings
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