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Blackrock’s Swan bets on India, Indonesia

Asian markets that fell the most during the first half will do the best in 2019, argues Blackrock's Andrew Swan.
Andrew Swan, Blackrock

It has been an unusual year for Asia’s equity markets as there has been a divergence between company earnings and equity returns.

“Over the long-term, there is a very high correlation between corporate profit growth in the region and equity returns. But certainly on a short-term basis, these two trends can diverge,” said Swan, Hong Kong-based head of Asian and global emerging markets equities, at a recent media briefing.

In China, for example, corporate profit growth was up 22% this year, but the China equity market was down 25%.

Sentiment has deteriorated in the region, Swan explained. The market is expecting a slowdown in earnings growth in Asia-Pacific from 15% to high single digits in 2019.

In addition, three headwinds also weigh on investor sentiment: China’s deleveraging, the Fed’s tightening and geopolitical tensions between the US and China.

“However, having said that, I do think the headwinds are starting to alleviate.

“So there is a good chance here that we will see a mirror image of what we saw for most of this year, where we will start to see stronger equities returns in an environment where corporate profit growth is moderating, but with the outlook for profit growth actually improving given these headwinds we are seeing are reversing.”

India and Indonesia

Swan noted that investors looking at Asia-Pacific should watch currencies carefully.

“The US dollar in particular is so important for the region,” he said.

A number of industry professionals did not expect the dollar to strengthen this year, which had a negative impact on asset allocation recommendations in emerging markets.

Blackrock, however, has become “cautiously optimistic” toward emerging markets and expects a weakening dollar.

“We potentially see a less strong dollar and the potential of even a Fed pause. That would bode well for emerging markets going forward,” Belinda Boa, head of active investments for Asia-Pacific and chief investment officer for emerging markets, said at the briefing.

Swan believes that Asia-Pacific markets that were impacted the most in the first half of the year will do the best in the early part of 2019.

“So we’re favourably disposed toward countries like India and Indonesia, which will also benefit from weaker oil prices in addition to [their own] strengthening currencies.

Both the MSCI Indonesia and India indices hugely underperformed the broader Asia market in the first half of the year, according to data from FE. However, year-to-date, both country indices didn’t fall as hard as the broader market.

Source: FE Analytics

“Indonesia is the most interesting market for us right now, given that it was a market which suffered heavily due to the [rupiah] currency weakness,” Swan said.

However, the country’s central bank was pro-active in raising interest rates quickly as the problem started to emerge. In addition, despite rising interest rates, the economy remains robust, he said.

Turning to India, Swan said that economic growth in the short-term has been disappointing due to the continuous reform process that the government has put in place.

“But we have seen the economy starting to accelerate throughout the course of the year,” he said.

The Blackrock GF Asian Dragon Fund, which Swan manages, has India and Indonesia as the biggest overweights relative to its benchmark index, the MSCI AC Asia ex-Japan Index.

India accounts for 16.47% of the portfolio versus the benchmark’s 10.1%, while Indonesia has a 8.92% weighting, which compares to the benchmark’s 2.49%, according to the fund factsheet.


The Blackrock GF Asian Dragon Fund versus its benchmark index.

Source: FE Analytics


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