Raymond Chan, Allianz Global Investors
Year-to-date, Asia equities has been hit harder than the broader equity market. The MSCI AC Asia ex-Japan Index returned -6.54%, while the MSCI AC World Index returned 0.04%, according to data from FE Analytics. So far, the US has been the best performing market, returning 3.37%.
“Considering what we saw last year, when the Asian market was actually up 30%-40%, I think [-6.54%] is manageable given all the concerns, [such as trade wars and increasing interest rates], that we are looking right now,” Chan said at a media briefing in Hong Kong this week.
Chan remains positive on Asia equities because he believes the asset class is backed by positive earnings momentum. On average, earnings per share growth this year is 10%-15%, he said.
In addition, valuations in Asia are cheaper than the broader markets. The forward price-to-earnings ratio for the MSCI Asia ex-Japan Index is around 12x, versus MSCI Europe’s 14x and MSCI USA’s 16x, Chan said.
However, investors should use special caution when choosing Asia markets.
“Earnings growth is still there, but earnings revisions have been mixed, with some of the countries now seeing negative earnings revisions,” Chan said.
Examples of countries that have negative three-month earnings revisions are India, Indonesia, Philippines, Malaysia and Taiwan.
The same could be said about sectors in Asia. Earnings growth is positive across all sectors, but certain sectors, such as consumer discretionary, healthcare, utilities and telecommunications are seeing negative earnings revisions.
“The message this year is that things are going to be divergent. Whether it is countries or sectors, you have to pick the right stocks to deliver performance.”
North over South
Chan prefers North Asian markets, particularly Hong Kong and China, over markets in Southeast Asia, such as the Philippines and Indonesia, which have been hit hard by the appreciation of the US dollar.
The Allianz Asia Pacific Equity Fund, which Chan manages, is overweight China and Hong Kong relative to its benchmark index, the MSCI Asia Pacific ex Japan Index, according to its fund factsheet. When combined, the two markets account for half of the portfolio’s assets.
The strengthening of the US dollar has become a concern for Chan as a stronger dollar is unfavourable for Asian equities.
Other industry players, such as UBS Wealth Management, State Street Global Advisors and Eastspring Investments have also recently taken note of the appreciation of the US dollar and have made changes to their tactical asset allocations.
Chan has reduced exposure in countries where they are experiencing large current account deficits, such as the Philippines and Indonesia, which are more vulnerable to the appreciation of the US dollar.
“It is no surprise that Indonesia and the Philippines have suffered more year-to-date compared to the rest of the region,” he said.
Year-to-date, the MSCI Indonesia and MSCI Philippines indices had losses of -14.44% and -15.14%, respectively, according to FE data.
However, Chan noted that the US still has a deficit in its current trade account, just like in most emerging markets.
“That actually means that at some point, the market will realise the US dollar cannot be too strong. The US dollar might still be in favour right now, but I don’t believe that the dollar can continue to go up strongly from here.”
The Allianz Asia Pacific Equity Fund versus its benchmark index
Source: FE. All fund NAVs converted to US dollars for comparison purposes.