The Chinese Year of the Goat has proved disappointing so far: After a bright start to the year, Asian markets have fallen into negative territory year to date having been brought lower by a combination of global growth concerns as well as policy missteps in China. Fear has replaced greed, leading to much smoke and noise. We think now is a good time to take a step back, look beyond the current gloom and restate why we still believe Asia offers an attractive investment story into the medium- and-long term.
Long-term growth trends
Despite some near-term growth stumbles, Asia’s prospective growth rates are still three times that of developed economies (6% vs 2%, according to Goldman Sachs estimates). New industries are emerging all the time and billions of purchasers are upgrading their consumption habits. The challenge is ensuring that this growth is well-balanced and sustainable. There are encouraging signs: UBS research, for instance, indicates China’s services sector now makes up more than 50% of GDP; but there is more to do.
Policy support and reform
Having watched on with jealous eyes as developed markets brought their own versions of quantitative easing (QE) to support markets in recent years, Asia is now entering a phase where policy settings can be supportive. Asian real rates remain elevated, offering scope for further interest rate cuts. China and India lie at the heart of this equation. A credible package of monetary loosening – allied to targeted fiscal spending and continuation of the reform roadmap – can ensure that Asia benefits from its own mini-QE programme, helping to bolster valuations and earnings.
Valuation and dispersion
Sentiment towards Asia remains negative with recent fund flows painting a depressing picture. Signs of capitulation are generally the best buying opportunities in Asia on a medium-term view. When Asia has traded in the valuation range of 0.9 to1.4 times book value (current level is 1.3 times book value, Citigroup data show) then the probability of a positive return on a 12-month and 36-month view is greater than 80%. The widespread dispersion in market performance within the region also offers an attractive playground for bottom up active investors to take advantage.
So in summary, let’s not lose sight of some of the positive things going on in Asia. It won’t take much to move the sentiment dial and from this valuation level, history is in your favou
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