For those who missed this year’s stock market rally, Swan, speaking at a media event today in Hong Kong, said he does not think “it is too late to join the party”. He believes strong corporate earnings momentum in Asia will continue in 2018.
This year, listed companies in the region on average reported strong cash flow, cost discipline and domestic as well as external demand, which bode well for Asian equities next year, he said.
Within Asia, Swan is overweight China, India and Indonesia, three countries undergoing structural reform initiatives.
Swan noted that China’s economic reform will be the key to a positive equity market in 2018. “China’s economic growth is becoming more stable. The government is pursuing the quality of growth while moving beyond the quantity of growth,” he said.
Chinese authorities emphasised the importance of state-owned enterprise reform, including experimenting with new ownership structures, at the National People’s Congress in October, he added.
Swan sees the opportunity in the old economy in China, which includes the energy, financial and materials stocks.
Companies in China are gradually eliminating bad practices and beginning to stress corporate governance, Swan said. Additionally, with the scheduled inclusion of A-shares on the MSCI Emerging Markets Index next year, he expects Chinese markets to attract more foreign participation.
Edmund Yun of CIC Investor Services is also optimistic on China, and he cited four reasons to remain bullish on Chinese equities next year.
Swan also favours India for earnings recovery in the aftermath of reform efforts such as the demonetisation, which had hit many businesses in the short term. In Indonesia, he added, the economy has potential for a cyclical recovery.
Tech warning
Swan remains cautious on the IT sector in Asia, in particular some e-commerce platforms in China and large-cap tech companies in Taiwan but he refused to give names. Widely-held names in this sector include Tencent and Alibaba in China and TSMC in Taiwan.
He believes the sector’s expanding P/E ratio does not match with earnings growth. “Valuations of these tech stocks are too high and we do not see the earnings as sustainable in the economic cycle,” he added.
In another alert, he warned that the normalisation of interest rates in the US will have an impact on local companies listed in Hong Kong and Singapore. The view is reflected in his underweight of equities in these two markets. Hong Kong’s relatively low economic growth also makes local stocks less attractive, he added.
Swan was less concerned with broader geopolitical risk, which he expected to have only short-term and minimal impact on earnings and is unlikely to dampen overall Asia market sentiment.
