investment viewpoints

optimism returns to Asian markets in 2019.

optimism returns to Asian markets in 2019.

We believe there are reasons to be cautiously optimistic for Asian equities in 2019, despite an uncertain backdrop.

The pause in US interest rates means that monetary policies can now be more accommodative, especially as inflation in Asia is benign. Fiscal policies, particularly in China, are turning more stimulative to offset the economic slowdown.

The outlook for global growth continues to be led by Asian economies and will be supported by more accommodative policies. Most importantly, Asian equities valuations appear very attractive at present.

The prospect of a full-scale trade war between the US and China has, understandably, raised some concerns. We believe the worst case scenario is now less likely given recent developments.  China has indicated its willingness to strike a deal, although it has been frustrated by the capricious nature of the current US administration in 2018. However, President Trump, beset by domestic political setbacks, is now incentivized to reach some form of agreement with China. It is unlikely to result in a perfect outcome but the worst case scenario that has been partly priced into Asian equities seem less likely at this point.

Financials continue to have the best earnings visibility of the key sectors in Asia due to continued top line growth, driven by stable to improving margins and stable asset quality. Valuations of Asian banks are also about 30% below their average which makes them compelling when combined with the earnings visibility we see in the sector.

Despite the weak fundamentals currently present in Information Technology and Communication Services stocks, we expect the sector to find a bottom in the first half of the year and we believe it would be prudent to take this opportunity to build on selective themes that have a secular trend.

This includes electric vehicles (EV), broadband communications, and Internet/eCommerce leaders in China. We are less sanguine on smartphone-related names because it is no longer a growing sector. Unless there is a breakthrough in technology and innovative new features, the de-rating and price adjustments in this supply chain may take longer than many people think.

When it comes to India, we believe the market could be volatile in 2019 as investors grapple with the upcoming elections in May, and the government’s fiscal discipline. On a relative basis, however, we expect consumer-related stocks to outperform most other sectors, as any populist decisions will be aimed at supporting rural consumers.

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