AxJ Equities 1Q19: Policy and valuation support


Within ASEAN, we favour Singapore and Thailand
Chief Investment Office18 Jan 2019
Photo credit: AFP Photo


Asian governments have flexible policy options to cushion a slowdown. In the past, Asian economies have demonstrated resilience when facing external headwinds, such as trade wars. Given positive long-term fundamentals (such as strong FX reserves), Asian governments and central banks do have flexible policy options to cushion any slowdown from a potentially long-drawn trade war. Long-term economic plans are also in place to focus on stability and sustainability, including in China, Hong Kong, and Singapore. While some Asian economies are being challenged by the volatility of oil prices and fund outflows, we do not expect contagion, given the relative strength of their external balance sheets.

Valuation support for Asia equities. With the YTD underperformance of Asian equities, valuations have come down to 11.8x forward P/E – close to 1 SD below their 10-year historical average. This is also the level at which Asian equities used to bounce, as seen from previous market stress episodes – such as the eurozone crisis in 2011/2012, the taper tantrums in 2013/2014, and the Chinese yuan devaluation in 2015/2016. High cash levels among Asia ex-Japan funds suggest there is “dry powder” for markets to stage a rebound, once some of these uncertainties are gradually resolved. Furthermore, the Asian equity risk premium – the gap between earnings yield and the 10-year US government bond yield – suggests the region’s equities are inexpensive against current rate conditions.

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