As we enter 2013, we are positive on the outlook for equity markets across Asia ex Japan.
Despite volatility caused by events both within and outside of the region, it is important to recognise that Asia was one of the top performing regions in 2012 with the MSCI AC Asia ex Japan Index rising by 22.60% in US dollar terms over the course of the year.
This compares to respective returns of 18.6% and 16.8% from the MSCI Emerging Markets Index and the MSCI AC World Index in the same period*.
A major factor underpinning this is our belief that many of the external risks which have been plaguing markets in recent years - such as the fiscal cliff in the US -are now slowly being addressed. As Asian investors, we are also encouraged by the recent policy moves of the European Central Bank. Although a path of low to no growth will continue to have implications for Asian exporters, the Bank's bond buying programme has at least removed the immediate contagion threat of a bond buyers strike tipping a government into crisis.
We expect a stabilisation of the external environment - coupled with robust economic growth within Asia itself - to be positive for Asian equities as investors refocus on the attractive fundamentals of the region such as low levels of indebtedness and rising domestic consumption and investment.
This should result in Asian economies growing at a superior rate relative not only to the developed world, but also other emerging markets. We expect this to translate into strong performance from regional equities, particularly as valuations remain low relative to historical means and the rest of the world.
A clearer and improving outlook for China
As ever, China remains a key driver of the wider Asia ex Japan region and unlike 2012, when the outlook for the Chinese economy was one of the major uncertainties surrounding markets, there seems to be a clearer picture for 2013.
The Chinese economy was weaker than the consensus expected in 2012 and this was a drag on regional equities. There are now signs, however, that policymakers have achieved a "soft landing" and we expect to see relatively robust growth in China over the coming months.
The outcome of China's 18th National Congress is also positive for equity markets, in our view. While there will likely be no substantial change in key long-term economic policy, investors have welcomed the removal of uncertainty and we expect the new party leadership of Xi Jinping and Li Keqiang to direct more positive sentiment towards the market through the announcement of additional stimulus measures.
Against this backdrop, we are happy to maintain significant exposure to China across the Asia ex Japan equity portfolios which we manage. Although we expect the authorities to focus on implementing policies to boost consumption, infrastructure investment will also continue and this reinforces our positive view on the Materials sector and companies which we believe will benefit from rising spending in areas such as smart grid, irrigation works and alternative energy.
We are also becoming more upbeat on selected Chinese Financials such as ICBC and China Pacific Insurance. We believe that the announcement of the new leadership has improved earnings visibility for policy-sensitive areas such as banking and this, combined with attractive valuations, should deliver strong performance from the sector in 2013.
Relative to the rest of Asia ex Japan, the China A-share market also struggled to make headway in 2012. We believe that investors have been overly bearish on this market and that current valuations represent an attractive entry point for investors to participate in a long-term growth story and access firms which are either unavailable or under-represented in Hong Kong and overseas exchanges.
South East Asia likely to continue to deliver strong returns
Outside of China, we have significant exposure to the fast-developing economies of South East Asia, with a particular preference for Indonesia and Thailand. Here, we favour companies which we believe are well placed to capitalise on the twin drivers of long-term regional growth: rising consumption and investment in infrastructure projects.
We particularly favour Consumer-related sectors given the region's rapidly growing middle class. As income levels rise, spending in areas such as Health Care is increasing and Indonesia-based Kalbe Farma is an example of a stock which plays directly into this theme. In our view, the company's strong brands and extensive distribution network reach means that it is ideally positioned to capitalise on the long-term growth in the pharmaceutical and consumer health markets.
Elsewhere, Thailand-based hospitality and leisure firm Minor International is another key holding. With over 1,000 quick service restaurants, we believe the company should benefit from rising disposable income across the region, while it is also exposed to the increase in regional - and particularly Chinese - tourism through its hotels business, where it manages more than 30 hotels under the Four Seasons, Marriott and its own Anatara brands.
Upbeat on Korean Tech
In Korea, we have a clear preference for the important Tech sector. Overall demand for mobile devices such as smartphones and tablets continues to grow and Korea is positioned at the core of this, with Samsung Electronics one of the few viable contenders to the Apple iPhone.
We also continue to identify investment potential in selected supply chain manufacturers in Korea as earnings growth should be well underpinned by the recent launch of Samsung's Galaxy S3 handset and Apple's iPhone 5. Our positive stance on the Tech sector is, however, offset by our caution on other areas of the Korean market such as the Financials, Utilities and Telecom Services.
Looking ahead, we expect Asian market to continue to look towards signs of stabilisation in key global economies such as the US, Europe and China. Although a degree of volatility will likely persist, we believe that equity markets are on a stronger footing and we are confident that the superior growth and fiscal dynamics of Asia ex Japan will lead to regional equities delivering attractive returns over 2013.
In this environment, we are focused on identifying long-term beneficiaries of Asian consumption growth, rising global Asian brands and strong yield providers as investor appetite for income continues to grow. We expect this strategy to rewards investors in our Asia ex Japan equity funds in 2013.
HyungJin Lee
Director, Baring Asia Pacific Equities Team
Investment Manager, Baring Asia Growth Fund and Baring Eastern Trust
Baring Asset Management, Hong Kong
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