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Axa keeps faith in Asia growth

The structural trends that are driving the region's economic growth and markets remain intact, and will overcome current fears, according to Axa Investment Managers.
Simon Weston, Axa Investment Managers

“The prospects for Asian equities remains positive, despite the volatility in markets caused by the coronavirus outbreak,”  Simon Weston, senior portfolio manager, Asian equity at Axa Investment Managers told a media briefing this morning.

He believes that the effects of the virus are likely to be short-term and should not derail the “secular growth story in the region”, which is underpinned by advantageous demographics, an expanding middle class and increasing urbanisation.

“These long-term structural drivers favour sectors such as consumption, information technology, infrastructure, healthcare and education in particular,” he said.

Weston is the lead manager of Axa World Funds Framlington Asia Select Income Fund, which has posted a 17.80% three-year cumulative return, with annualised volatility of 12.45%, according to FE Fundinfo data. The fund’s most recent factsheet shows a substantial underweight to China, but overweight allocations to Australia, Hong Kong and Singapore.


Axa World Funds Framlington Asia Select Income Fund allocations vs MSCI AC Asia ex-Japan benchmark index

Source: Fund factsheet, 31 January 2020

Weston expects earnings growth to accelerate to the high teens in 2020, led by the semiconductor sector and the roll out of 5G technology, and noted that those structural forces will propel future earnings growth that should provide investors with rising income streams over time.

Weston also highlighted the strong balance sheets of many Asian companies relative to the rest of the world, with an average cash-to-market capitalisation ratio of almost 25%, which offers potential for higher dividend payouts that, at around 35% of earnings, are well below Europe and the US.

“Stock market returns are likely to be enhanced by rising dividend payments and other forms of capital management, [which reinforces the argument] that Asia is is still the most attractive equity opportunity globally,” he said.

However, he warned that the duration and the severity of the coronavirus epidemic is critical, while the uncertainty of both was stressed by Aidan Yao, Axa IM’s senior Asia economist.

Yao described three possible scenarios and their impact on the Chinese economy.

A benign outcome would see the rapid containment of the virus, confining a negative growth shock to the first quarter, and allowing China to post full-year GDP growth of 5.3%.

A more drawn-out battle against the virus to the end of the first half of the year “might create second-order impacts in terms of rising defaults, unemployment and income reduction, as well as weakening the subsequent recovery,” he said.

In this scenario, Yao would expect full-year growth at 4.8% which, although disappointing, would still be far better than the worst scenario — “a catastrophe that is hard to quantify”.

“A failure to contain the virus would lead to prolonged production shutdowns and widespread fears that would curtail economic activity, while its spread to other countries as a worldwide pandemic might lead to a global recession,” said Yao.

“In any case, China’s close integration with neighboring countries will propagate the shock to Asia,” he added, emphasising that small, open countries such as Hong Kong, Taiwan, South Korea and Singapore were most vulnerable.

However, Yao and Weston were both encouraged by the fiscal and monetary policy support provided by the Chinese authorities to invigorate the economy, although as Yao pointed out:

“Simply cutting interest rates will not be enough if people are staying at home and not going to work or to shop.”


Asia’s vulnerability to the coronavirus epidemic

Source: Axa IM research (February 2020)

Axa World Funds Framlington Asia Select Income Fund vs MSCI AC Asia Pacific ex-Japan index and sector average

Source: FE Fundinfo. (Three-year cumulative returns in US dollars)

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