Outlook 2018 - Asia equities: Bottom-up, stock specific opportunities abound

Outlook 2018 - Asia equities: Bottom-up, stock specific opportunities abound

Easy money has been made in the recent market rally. Going forward, performance will be driven by fundamentals. Such an environment will favour bottom-up stock pickers who can identify long term winners.

What is your investment outlook for Asia equities in 2018?

I would start with the caveat that I am a bottom-up stock picker and my macro views are only a backdrop that I keep in mind to be aware of the operating environment for companies in the region.

2017 has been a strong year for Asian equities in absolute terms as well as relative to other emerging and developed markets. This was largely due to three factors:

 gains in Asian currencies, largely due to the weakness in US dollar,
 a large dose of liquidity injection in China that stimulated economic growth and drove asset prices higher in China, and,
 strong earnings growth in Asia.

Going onto 2018, I think we could be entering a period of consolidation as all the above drivers seem to be weakening at the margin.

The US dollar may find support from a healthy US economy with low unemployment and robust wage growth, and outpace emerging market currencies. China’s liquidity binge is already showing signs of reversal with a sharp fall in new project announcements and a clampdown on shadow banking. Finally, earnings revisions in Asia, which have been driven by a narrow set of stocks in the semiconductor and financials space, seem to be peaking.

Meanwhile, market valuation in Asia, as measured by price-to-earnings ratio, is now about one standard deviation above its long-term average. This will look reasonable only if earnings continue to grow at a decent pace. The good news is that Asian stock valuations continue to remain attractive relative to the developed world.

Chart 1: Strong Asian performance in 2017

Source: Datastream, November 2017

What do you think could most surprise investors next year?

If we dig deeper, we find that the markets in Northern Asia (China, Taiwan, Korea and Hong Kong) have significantly outperformed ASEAN countries (such as Indonesia, Malaysia, Philippines and Thailand), and, to some extent, it may now be ASEAN’s turn to catch up in 2018.

We are seeing signs of economic stability across the ASEAN region, and any turn in the economic and earnings cycle could lead to a meaningful catch up in market performance.

How do you plan to capture the best opportunities and add value for investors?

I am constructive on the ASEAN economies as they are bottoming out and are under-owned by investors. In addition, I continue to find many investment opportunities from a bottom-up basis, including in sectors such as healthcare, financials, travel and tourism, and industrials where stocks are mispriced relative to their long term growth potential.

Asia still looks attractive compared to the rest of the world. However, on an absolute basis we do need to see continued earnings upgrades in a broader set of industries to sustain future performance.

For bottom up stock pickers like me, Asia’s diversity is useful as a source of opportunities. I am continuing to find new investment ideas at attractive valuation levels, despite the strong recent performance on the index.

DHANANJAY PHADNIS is a portfolio manager at Fidelity International and is based in Hong Kong. He joined Fidelity in 2004 as an investment analyst in Mumbai, India. In 2008 he became a portfolio manager and in 2009 was also assigned director of research. He has previously worked as an equity research associate at JP Morgan India. Dhanjay holds degrees from IIM, Bangalore and Pune University, India. He is also a CFA charterholder.



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