Joanne Goh
Regional equity strategist
DBS Group Research
We believe China or Hong Kong and Taiwan equity markets are best poised to benefit from improving investor confidence as market optimism is mainly focused on China’s recovery.
DBS is looking at economic growth in 2013 returning to 9% in China, brought about by exports recovery and investment growth. China investment growth was 30% below normal levels in 2012, leading to a sharp drop in headline gross domestic product (GDP) growth. We think at least half of that gap will have to close in 2013, which can easily raise headline growth to China’s new targeted level.
As such, we place high conviction on China railway, cement sectors, and turnaround manufacturing industrials, which should lead earnings recovery. Sectors which are affected by policy and political uncertainty in China which have strong structural demand include the autos and consumer discretionary sectors. We also like early cyclical plays, in particular, the transportation sector including airlines, shipping and ports.
Taiwan also stands to benefit from a better China outlook. The top down picture looks strong for Taiwan as it enters into a sweet spot of rising growth and falling inflation next year. Taiwan’s GDP growth is expected to jump to 4.2% from 1.1% in 2012. The economy has been growing at below potential for six quarters, due mainly from a sharp drop in demand from China.
On the back of a cyclical recovery in the Chinese economy, broad-based industrial activity including production and investment is likely to pick up strongly in Taiwan. The progress of cross-strait negotiations on economic cooperation is also expected to reaccelerate in 2013. New business opportunities can be expected for the domestic sectors including banking and tourism related sectors.
Chris Adams
Senior product specialist (equities)
HSBC Global Asset Management
2012 felt like a tough year for equity investing, with markets buffeted by headlines around eurozone debt, the US fiscal position and fears of a hard landing in China. Yet amid all this noise Asia ex Japan equities delivered strong gains; the MSCI Asia ex Japan was up over 22%.
So how do we see 2013 playing out? As we stand here today, economic indicators are encouraging and most leading sentiment indices are in expansionary territory. We are optimistic on Asian equities this year, for three key reasons.
First, indicators suggest that regional economic growth will strengthen into 2013. It is likely to be moderate, but this is acceptable for authorities wary of inflation. This recovery is feeding through to corporate earnings. Aggregate expectations for 2013 earnings slid over much of last year, but have recently stabilised and in some cases improved.
Second, policy is a key driver of Asian equity returns and it remains supportive in the near term, although we will need to keep a close eye on inflation. Crucially, China’s new leaders have signalled their focus on structural economic reform. In a symbolic gesture Xi Jingping, China’s president-elect, made his first visit as party leader to Shenzhen, a city that has been the flagship for Chinese economic reforms.
India is also starting to push through some much-needed changes. Asian authorities have been focused on the short term during recent global economic weakness. Indications that they now have an eye back on the long term will also buoy investor sentiment.
Finally, valuations are very attractive at this point – despite the market gains in 2012. A simple comparison with history suggests that, from current valuation levels, there is a very strong chance of positive gains over the subsequent 12 months. For people looking to invest in the long-term opportunities offered by Asia, today’s price is a good one.
Michael Kurtz
Chief Asia equity strategist, equity research Asia ex-Japan
Nomura
This looks like Japan’s year. Global stocks have staged a remarkable resurrection from their nearly inconsolable despair of mid-2012, when concerns about a eurozone breakup, US double-dip recession, and Chinese hard-landing dominated investor sentiment. Since then, much has gone right in each of those key geographies, but the most important single development for financial markets has been the achievement of a ‘global consensus’ in favour of deliberately inflationary monetary policy.
Asia Pacific equities – being particularly sensitive to global growth and risk appetite – have been a disproportionate beneficiary of these improvements, up 26% since the summer lows of 2012, outperforming the MSCI World benchmark.
There were two keys to the completion of the global inflationary consensus. First was the European central bank’s (ECB) September adopting its ‘OMT’ (outright monetary transactions) mechanism enabling direct monetisation of distressed sovereign debt.
Second was December’s Japanese general elections, in which the former-ruling Liberal Democratic Party stridently advocated a more aggressive Bank of Japan (BoJ) inflation target – and was returned to office with an unequivocal two-thirds majority. Prime minister Shinzo Abe will soon be nominating a new BoJ governor whose assignment will be to put reflationary rhetoric into action.
Not only could even modest reflation of Japan’s nominal GDP growth and corporate return-on-equities (ROEs) – say to high single-digits from their dismal 4.3% over the last 12 months – handily justify a Topix re-rating from its current ‘world-low’ 1.1 times back at least toward its post-2001 average of 1.4 times – nearly 30% upside – but there’s no shortage of underweight institutions increasingly prepared to do the heavy lifting.
Indexed foreign investors appear at least two percentage points below Japan’s 7.3% weighting in the global benchmark, implying a nearly 50% increase in their equity holdings just to get back to neutral.
Meanwhile Japanese domestic pension and insurance funds’ equity weightings are at 20-year lows while bond allocations are at 20-year highs – a portfolio strategy tailor-made for Japan’s two-decade deflation but ill-calibrated for a coming pickup in nominal growth. As they raise equity weightings the Topix will do very well.