While it’s generally considered a given that Asian equities offer the opportunity for good returns over the next few years, there are no signs of excessive complacency in the market that would usually signal that shares are becoming overvalued, says Mr Evan Erlanson, chief investment officer of boutique Asian equities manager Seres Asset Management.
“Volatility levels and options market activity show normal levels of risk appetite from investors rather than excessive optimism, while hedge fund net exposure levels and leverage are still well below pre-crisis levels.
“This suggests that there are still plenty of opportunities for investors to buy into certain Asian markets at prices that reflect good value and still contain upside.
“We expect to see healthy inflows into Asian equities right up until the end of the financial year, with net Asia (excluding Japan) fund inflows for the full year possibly exceeding the record US$60 billion seen in 2009.
“However, investors need to choose wisely as there is still volatility in some markets. Some consumer stocks have been consensus buys for some time and are trading at premium valuations relative to expected growth, particularly in the south-east Asian markets.
“In these markets, we expect to see continued evidence of strong underlying consumer demand and persistent upward pressure on currencies.”
Mr Erlanson said that Asian markets will continue to drive the global recovery over the next few years.
“Equities will generally become more attractive in the short- to medium term, due to declining sovereign credit quality in the developed world, but we expect Asian equities to look even better in a world of low yields, subpar growth and disinflation or even outright deflation.
“US dollar weakness, strong underlying demand from China and India, and supply constraints will also underpin strong commodity prices in the medium-term.
“We believe that emerging market central banks and sovereign wealth funds, and even corporates and individuals, are only just beginning to diversify holdings away from the US dollar and euro. Combined with a reluctance to raise interest rates and the difficulty of stemming so-called “hot money” inflows, Asian asset inflation will be a persistent medium- to long-term theme,” Mr Erlanson said.
Dr Ken Lu, senior portfolio manager at Seres, added that Hong Kong and China in particular will benefit from the liquidity flowing into the Asian region.
“China’s A sharemarket has rallied strongly on record trading volumes, ironically as the government’s property cooling measures drove return-seeking capital back into the equity market. In the past few weeks, MSCI China clearly broke out of its trading range and we continue to see chances of significant outperformance.
“In Korea, significant corrections have created buying opportunities in certain sectors. Despite well-known demand-side headwinds and currency appreciation, Korean exporters continue to gain market share in their respective industries while delivering solid profitability. There are good buying opportunities in Korea’s industry leaders in the technology, transportation, and chemical sectors.
“On the other hand, tech-heavy Taiwan continues to see the most unfavourable earnings revision trends in the region. It is becoming increasingly difficult to identify undervalued franchises in Taiwan, where the profitability of many technology bellwethers has proven extremely vulnerable to rising labour costs in China; market share loss to larger and better-capitalised Korean rivals; and dramatic shifts in the end market for consumer electronics (e.g. the popularity of tablet PCs).
“While it has appeared for some time that ‘value is emerging in Taiwan, the big risk to investors is that a large segment of corporate Taiwan is not only suffering a cyclical downturn, but that certain end markets are disappearing due to structural shifts in the technology ecosystem.
“In Japan, the macro environment is now more favourable since the second round of quantitative easing (QE2) was announced by the US. By increasing risk appetite, QE2 has caused global currencies to appreciate slightly against the Yen, creating a more stable environment for corporates and investors alike.
“With about half of Japan’s listed companies having reported September quarter results, the majority have beaten consensus estimates and raised full year guidance, an impressive feat considering the challenges facing these companies,” Dr Lu said.
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For further information please contact:
Mr Evan Erlanson
Phone: +852 9323 6102
Email: evan.erlanson@seresam.com
Dr Ken Lu
Phone: +852 9163 5510
Email: ken.lu@seresam.com
Disclaimer: This material has been prepared for general information and does not constitute a recommendation or financial advice and is not to be relied on as such. The information does not take into account the objectives or circumstances of any individual and we recommend consultation with a qualified adviser prior to making investment decisions. No warranty is given as to the accuracy, reliability or completeness of the information and no liability is accepted whatsoever for any error or omission in this material resulting in loss or damage of any kind suffered from reliance on this material.
