Position Defensively

Asia markets are likely to face a volatile summer as the US-China trade dispute intensifies. We believe the correction in May is just the beginning of a risk-off move.
Joanne Goh03 Jun 2019
  • Asia markets could have downside of about 16% if further tariffs are imposed
  • Not time to bargain hunt yet until valuations are more palatable
  • Correction should be shallower and over a shorter period than last year
  • China/Hong Kong, Singapore, Indonesia and Philippines are our favoured markets
Photo credit: AFP Photo

3Q strategy — Position defensively

Asia markets are likely to face a volatile summer as the US-China trade dispute intensifies. The world awaits with for 17 June, when a decision will be made on the fate of USD300bn worth of Chinese exports. If these goods are hit with tariffs, there will be implications on global growth, cause an abrupt halt to the late cycle, and also exert downside pressure on the RMB and Asian currencies. We believe the correction in May is just the beginning of a risk-off move, and if further tariffs are imposed, further de-rating can be expected.

To recall, Asia markets were in a corrective mode for slightly more than six months during the trade war spats last year. Based on what happened in 2018 and valuations touching recent lows, Asia markets could have downside of about 16% from here.

Correction so far should be considered healthy

Asia ex-Japan PE valuations, at end-April, had returned to near +1SD above historical average compared to -1SD at the beginning of the year, leaving very little room for valuation re-rating. A correction, if any, should be considered healthy as it resets Asia markets to more attractive levels. Current valuations are still above average, and hence it is still not a good time to bargain hunt, in our view.

However, we think this time round, compared to last year, the correction should be shallower and over a shorter period than last year. Compared to last year when the Fed was hiking rates multiple times, expectations were high in terms of growth, and government policies were more of tightening rather than stimulating, especially in China. In contrast, the current environment is more supportive of growth.

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Joanne Goh

Regional Equity Strategist

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