Can low valuations revive Asia equity sentiment?

In 2018, the MSCI Asia ex Japan Index was the second worst performer (-14.3%) compared to the MSCI indices for the US, Japan, Europe and emerging markets.

All Asian markets suffered in 2018. China A-shares took the severest battering, falling 39.8% from its 25 January peak, according to Allianz GI data.

Could this year be different?

“The key to a sustainable market recovery will likely be economic stabilisation in China, which we expect to happen later in the year in response to fiscal and monetary policy initiatives,” said Raymond Chan, equity chief investment officer, at a media event in Hong Kong yesterday.

“For the time being, economic data in China has been weakening and trade tensions with the US are likely to be an ongoing source of friction over the longer term. This may well lead to weakness in corporate results” he added.

The biggest concerns are that there will be a full-blown Sino-US trade war or that the US Federal Reserve returns to a more aggressive interest rate hiking stance due to inflation worries.

Valuation lure

Nevertheless, “given the volatility of recent months, valuations have come back to increasingly attractive levels”, Chan said.

“Rising trade spats and political uncertainties dragged market returns into negative territory last year, but Asian equities have become more appealing since then,” Chan said.

Tim Orchard, Fidelity’s chief investment officer for equities in Asia Pacific ex-Japan, cautiously agrees.

“Valuations are now very supportive. Even if earnings growth deteriorates further, which may well occur, non-earnings based measures suggest that regional equities offer compelling value both relative to history and to developed markets,” Orchard wrote in a recent client note.

According to Chan, the trailing price-to-book ratio of Asia ex-Japan stocks is currently 1.42 times, close to the lowest levels reached during three periods of severe market downturns since 2000, and well below its 1.8 times average.

The forward P/E of the MSCI Asia ex-Japan is less than 12, below the multiples of the US and Europe indices.

Chan also pointed out that the inclusion of China A-shares into the MSCI Emerging Markets Index “sets to raise the market’s profile and attract capital flows globally”.

He argues that recent moves by the People’s Bank of China, including cuts in banks’ reserve requirement rations and increased availability of its lending facilities may help stabilise GDP growth and help boost investor confidence.

Sector bets

Chan co-manages the $259.3m Allianz Total Return Asian Equity Fund. The portfolio’s geographic allocation is overweight against the benchmark MSCI Asia ex Japan Index in China, Taiwan, Thailand and the Philippines and underweight South Korea, India and Malaysia.

The fund’s biggest sector bets against the benchmark are to consumer discretionary and property. It is underweight materials, information technology and communication services – although it has significant overweight positions in Tencent, Alibaba and Taiwan Semiconductor.

Sector breakdown 

Source: FE Analytics; MSCI Asia ex Japan and fund factsheet

Allianz Total Return Asian Equity Fund vs sector and benchmark, annualised

Source: FE Analytics. Data to 18 February 2019). In US dollars.

Allianz Total Return Asian Equity Fund vs sector benchmark, cumulative

Source: FE Analytics. 3 year cumulative return in US dollars.