The outlook for returns over the next 12 months is quite strong as long as the countries in the region also continue to carry forward their reforms initiatives, Swan said.
“Broadly, earnings growth in Asia is expected to be in high single digits next year. In an environment where policy is easing generally, growth is coming back, and the price-to-earning multiple is expanding, then the return potential is higher.
“If inflation continues to fall the way it has been and growth continues to stabilise or improve, that could be a real sweet spot for equity returns,” he added.
Investment ideas
India clearly remains the most favoured market for BlackRock, driven by the reform initiatives of the new government, which he believes can lead to growth acceleration.
“Positive change is coming through from the new government and it is infectious. It is very visible and we expect that process to continue and that will support equities.
“We are seeing micro reforms in terms of approval process and deadlines within the government, which is the first wave of reform. The next big macro reforms would be the GST [goods and sales tax] next year. If introduced, that would add around 2% to the growth alone, which is quite significant, when the growth is around 5%.”
Swan prefers North Asian markets over Southeast Asia.
“The challenge with Southeast Asian markets is that fundamentals and economic momentum have been slipping through the course of this year. At the same time, equities have been going up. So the market is actually becoming more expensive.”
In North Asia, Swan sees the investment theme as more of a value story than one of growth.
“There is value to be realised in places like China and Korea. The financial conditions are easing and reforms are coming through in China.”
China is in transition to lower but higher quality growth, he said. “This is possible with a lighter and sensible application of measures by policy makers, such as targeted liquidity and select infrastructure projects.”
In Korea, change is harder. “But we will see more news in regards to reforms within Korea. Valuations are very cheap in a large part of the market, reflecting the difficult cyclical environment historically.”
The market has been oversold on the back of yen’s weakness against the US dollar, he said. Korean exporters, which tend to report earnings in US dollars, compete against the Japanese, which have a cheaper currency and therefore an edge in exporting.
Earnings downgrades this year from Korean companies are linked to the currency issue, he said. However, the situation is changing.
“You will find in the fourth quarter, [Korean] companies will have a healthy reporting season, the first one in a long time.
Looking at Japanese equities, Swan said questions remain because they “continue to be a play on monetary growth”.
