Dazed and confused in Asian markets is a guest post by Hugh Young of Aberdeen Asset Management
‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.’ Famous words written about an earlier period of upheaval. But they could just as well be describing the contradictions in Asian markets this year.
Investors may be confused, and with good reason. On the one hand, reform-minded leaders are at the helm of many of the region’s biggest economies; government finances are in better shape than they have been for some time; while cheap oil has boosted consumer sentiment and delivered an unexpected windfall for many countries.
On the other hand, economies struggle to grow; maritime disputes in the South China Sea are stoking political risk; and the prospect of US Federal Reserve policy pushing the dollar even higher threatens to curtail returns for many foreign investors.
Some Asian markets are on a tear. The MSCI India Index returned some 23.3% in dollar terms during the year to April 17, after dividends were reinvested. So-called A-sharesA trading in Shanghai and Shenzhen delivered a total return of 109.1% in dollar terms over the same period. Shares of Hong Kong-listed Chinese companies returned some 10.5% in the three days following the long Easter weekend.
For the region as a whole, the MSCI Asia Pacific (ex-Japan) Index returned 10.4% over the past 12 months in dollar terms. Meanwhile, the MSCI Indonesia gauge delivered a total return of just 3.2%, following the rupiah’s 11% slide against the dollar. Investing in Asia seems a lot like playing the lottery.
So what are investors to make of all this? For a start, this seems like a good time for caution because there is precious little correlation between corporate earnings and stock prices. For example, it’s getting harder to justify Indian share prices at current levels without an improvement in revenues. Prime Minister Narendra Modi has pledged to sweep away entrenched obstacles to growth, but stock prices reflect changes he has yet to deliver.
Indonesia, like India, is another ‘fragile five’ country that benefited from investor goodwill following the election of a ‘pro-business’ leader. However, reliance on foreign funding means President Joko Widodo must maintain the pace of reform to satisfy heightened expectations. While cheaper oil has brought benefits (policymakers have cut costly fuel subsidies), lower commodity prices are also hurting this exporter of natural resources.
Political stability may have helped shares in Thailand achieve a total return of just under 13% in dollar terms over the past year, but this has come at the expense of political freedoms. The country’s post-coup military rulers maintain a tight grip on the economy, which struggles to gain traction even as tourism shows some signs of recovery.
Elsewhere, Chinese share gains are the envy of the world as the nation’s retail investors, starved of attractive alternatives, flock to the stock markets amid speculation Beijing will do more to cushion a slowing economy and support asset prices. Last month’s decision to permit mainland mutual funds to trade Hong Kong-listed shares via Shanghai has channelled some of the euphoria into the semi-autonomous former British colony.
While the long-term investment story for Asia remains intact – rising wealth, younger populations and pent-up demand for consumer goods – the immediate outlook is unclear. That’s because share prices have been inflated by speculation and, in an operating environment that remains tough, company revenues are often flattered by foreign exchange gains when dollar-denominated overseas earnings are booked in a weakened home currency.
Then there’s the impact of US monetary policy to consider. Policy ‘normalisation’ this year may be a good thing because it points to US economic strength and weans markets off speculative capital, but the prospect of a rate hike could compel fund outflows from Asia in the near-term, damaging investor confidence.
Another concern is the collapse in commodity prices. Lower oil prices may have brought benefits to the region but cheaper commodities also hurt Asian economies that rely on sales of natural resources. A reduction in Chinese demand is largely to blame, as Asia’s biggest economy balances the need for growth with essential reforms designed to fix structural imbalances and boost sustainability.
While a slowing China is a worry for everyone, policymakers there at least have the financial resources to cushion the economy from a so-called ‘hard landing’ as well as safely deflate any asset bubbles.
This may prove to be a watershed year as the US central bank plots an exit from the emergency measures that followed the global financial crisis, even as policymakers elsewhere remain committed to the stimulus that has boosted asset prices.
Given these uncertainties, investors would do well to go back to basics: Embrace businesses that are easy to understand; look for companies with broad regional exposure, established franchises and solid finances; seek out firms that respect minority shareholders. Then when all the boxes are ticked, don’t overpay.
These are tried-and-tested strategies that our managers in Asia have employed for more than two decades. They should prove useful at a time when nothing seems to make sense anymore.
Hugh Young, Managing Director, Equities – Asia
Aberdeen Asset Management
Dazed and Confused in Asian Markets is a guest post and the views here do not necessarily concur with those of Investment Quorum. In fact, it is very often the case that we may largely be in disagreement but we respect the opinions and views of others and value their contribution to the wealth management debate. Guest posts may appeal more to some than others and may often hav an industry or sector knowledge expectation.
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