Asian earnings will remain subdued
However, lower valuations for stocks are significant positive
The past year has been a bumpy one for Asian stockmarkets. Equities climbed in the first quarter, only to fall dramatically in May as fears over the dreaded Greek exit from the eurozone reached a pitch and economic news, particularly China’s, disappointed.
Markets seemed to get back on track after the European leaders’ June summit. Since the year began, the MSCI All-Country Asia Pacific excluding Japan index is up roughly 5 per cent in dollar terms.
Looking ahead, there are problems galore. First, the pledges made at the European summit may not be met. Yields on peripheral European debt are rising again. Unsustainable levels of government debt and deficits persist and there is no ready way to fix them, whether through a fiscal union, or, as proposed, via a recapitalisation of the banking sector, backstopped by the European Central Bank. Austerity policies, meanwhile, continue to weigh on economies.
On the other side of the Atlantic, US households are reducing their indebtedness but economic data has been mixed. Housing prices have steadied but job growth is disappointing. And if not renewed, the year-end expiration of tax cuts could push the economy into recession.
Asian economies are not without problems. Growth is moderating. Notably, weak Chinese data have weighed heavily on investor sentiment. The softness in demand from the west threatens to constrain the region’s economic outlook further.
We are often asked if we’ve shifted our portfolio positioning or altered our strategy in view of the deteriorating macroeconomic environment. The short answer is no. Worries about Asia tend to overlook some facts. Sound public finances (India is the exception) give governments room for stimulus. The downturn in inflation (again excluding India) provides additional scope for monetary policy easing and is also expected to boost consumption. Already, China has cut interest rates twice in a month to support growth. More central banks could follow suit as policymakers shore up domestic demand to offset external weakness.
Admittedly, corporate earnings could stay subdued in light of the uncertain global backdrop. But there is a natural defensiveness to our regional portfolios, given our emphasis on analysing companies’ balance sheets, generation of cash and sensitivity to the environment in which they operate and the sustainability of their business models.
Furthermore, we have been vigilant in topping up holdings that offer attractive value or pruning positions when valuations become overstretched. There have been few name changes to our portfolios, though. This is a reflection of our long-term buy and hold strategy.
As for markets, given how much economic decisions now rest with politicians, fluctuating appetite for risk among investors seems inevitable. There will be trading rallies, the recent upturn being a case in point. But the good news in Asia is valuations. The average stock in the MSCI All-Country Asia Pacific excluding Japan index is priced at 1.6 times the value of its net tangible assets, or book value, compared with an average of two times over the past five years. Any setbacks will present opportunities for prudent investors who follow the fundamental principle of buying decently priced, good quality companies.
Hugh Young is managing director of Aberdeen Asset Management Asia