This year has been a remarkably buoyant one for Asian stock markets so far. Whether that will continue next year remains a big question mark, but the region continues to enjoy a surfeit of good news that might just help the bulls to sustain their already remarkable run for even longer than anticipated.
The visit by US President Trump to the region in November has boosted sentiment when instead of instigating a dangerous and destructive trade war with China, the American leader went back home rewarded with significant trade deals not only from China but also its other leading trade partners such as Japan and Korea that will significantly boost US growth in the years ahead and hopefully maintain the peace in commerce and trade that benefits both sides of the Pacific.
The war rhetoric on North Korea that had unnerved markets in the previous months has also gone quieter, making market participants less concerned about the potential for a conflict that could completely undermine economic and political stability in the region.
Meanwhile, the long-moribund Japanese economy has returned into the growth mode that has eluded it for decades and the renewed optimism permeating the country due to Abenomics was mirrored by the Nikkei’s 225’s strong 8% gain in October.
The continuing strong economic growth in China and its push to reform its markets and economy continue to focus global attention. The successful conclusion of China’s National People’s Congress in October resulted in Xi Jinping’s consolidating his powerbase in a move that will see him more effective in pushing reforms that will benefit its markets.
China’s ambitious reform efforts have led to a steady revival of interest among global allocators for its markets. Various reports have indicated that Northbound trade activity in both the Shenzhen and Shanghai Connect this month have soared to their highest since these programs were opened to attract overseas institutional money to Chinese markets.
Many see the current influx of global allocators to China as nothing more than adjustment of an anomaly, where most of them had remained heavily under-allocated to the country that is already the second largest equity market in the world.
The inclusion of China A-shares within MSCI’s Emerging Market index from June 2018 has clearly whetted investors’ appetite for China’s securities and in recent months allocators and managers have noted the strong pick-up in terms of enquiry on opportunities related to China and the rest of Asia from investors based on the US and Europe.
Hong Kong-based managers insist there is still a lot of room for most regional markets to keep climbing, notwithstanding the spectacular gains they have already made this year. The MSCI China has already gained more than 48% in the first 10 months of the year while Mumbai’s Sensex index has rallied by as much as 25%.
Optimism for the Chinese market remains strong. Many managers believe that since most of the investor attention this year has been directed to big market-cap firms such as Alibaba and Tencent, the focus will shift dramatically towards the lesser known universe of smaller and mid-sized companies that are also enjoying strong earnings growth and are rapidly expanding their market. Many of these stocks are still trading at a significant discount to their valuations and earnings and enjoy very high cashflow opportunities.
Given all the good news supporting Asian markets, it is no wonder that several managers have expressed a more optimistic outlook of markets compared to how they saw things just six months ago.
Jonathan Garrick, who runs the Neutron Asia Absolute Return Fund portfolio at Bric Neutron Asset Management in Hong Kong, says many of the companies in his portfolio are doing well and are benefitting considerably from the rapid implementation of fintech and AI into their businesses that have boosted productivity and revenue.
He nonetheless acknowledges that dangers lurk ahead for emerging market equities with the possible aggressive US rate hikes and sharply rising US dollar in the months ahead
He also cites possible drastic regulatory and policy changes in China and elsewhere as some of the factors that could impact sentiment, citing initiatives for instance against a speculative bubble in the property sector. “There is always the danger that changes in government regulatory policy result in business constraints or price caps that could be quite painful,” he says.
Garrick says the consensus among foreign firms in China is that the country remains a bright spot for their business and will continue to surprise on the upside. “If you talk to Apple and their iPhone sales, to Caterpillar, BMW or Adidas, all these companies are reporting significant sales growth helped by what is clearly a robust consumer economy.”