China and Singapore offer best risk-adjusted return in a growth-scare environment
 


Our expectation for China’s macro momentum to stabilize in the coming months, thanks in part to further monetary and fiscal policy easing, drives our positive view on Chinese equities. Additionally, some of the headwinds from 2018 such as earnings downgrades, CNY depreciation and regulatory risks for the internet sector appear to be fading. After months of earnings downgrades, we are seeing a stabilization in the earnings revision cycle. This gives us confidence that Chinese equities can deliver double-digit earnings growth in 2019. As valuations remain attractive, with the MSCI China Index trading at a 12M forward P/E of 10.5x, we believe there is significant room for re-rating. We are particularly constructive on the internet sector, which is seeing renewed investor interest given its structural growth story, reasonable valuation and fading regulatory risks.

Singapore remains our preferred market in Southeast Asia, as it offers a combination of healthy growth and cheap valuation. Though the Singapore economy will be impacted by any slow-down in the global economy, we believe the market has more than priced in the risks, with its 12M forward P/E ratio at 12.0x, one standard deviation below historical average, and high dividend yield of 4.6%. Stable earnings revisions over the past few months also suggest limited downside for market expectations of 7% earnings growth for 2019.

Replace India with Taiwan as our least preferred market: This month in our Asia equity strategy we replace India with Taiwan as our least favored market. Though we continue to advocate avoiding Indian equities given their expensive valuation, downside risk scenarios such as state elections and tight liquidity in the credit market have already played out. We believe that recently lower oil prices, an expected shift by India’s central bank toward dovishness and the outlook for strong investment growth could provide support to the market on the downside. Therefore, we turn neutral on India.

Conversely, we see downside risks in Taiwan. The market is vulnerable to the slowdown in global industrial growth given its dependence on the manufacturing sector. The tech hardware sector, 57% of the Taiwan index, is under tremendous pressure due to slowing global smartphone growth and the warning from Apple of lower iPhone demand. On top of this, the market is witnessing substantial earnings downgrades, which could lead to negative earnings growth in 2019, resulting in further outflows. In light of these cyclical headwinds, we turn negative on Taiwan equities.

Asian fixed income to smooth out portfolio volatility Over the past month, global bond benchmarks have held up in the face of an equity sell-off as global government bond yields edged lower. Emerging market (EM) and Asian bonds have posted positive returns as the Fed turned more dovish and country-specific risks faded.

Looking ahead, the slowdown in global industrial momentum we expect may still create some drag, but we expect EM and Asian bonds to deliver positive returns in 2019 given the large undershooting of asset prices relative to the still robust growth environment, expectations of further USD consolidation, and only a gradual rise in US Treasury yields.





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