“We are not anywhere near [a bull market], we’ve got a few years to go,” Taylor said at a media briefing in Hong Kong yesterday.
Equity markets in the region have gone up significantly. Year-to-date, the MSCI AC Asia ex-Japan Index is up by 24.55%, according to data from FE Analytics.
Bull markets in Asian equities usually end when company earnings start to go down. However, companies are still at the beginning of that cycle, Taylor said.
For the first time in the last few years the firm forecast positive earnings for Asia’s listed companies. Earnings growth is expected to be 18%-20% – higher than the market consensus of 16%, he said, adding that he expects earnings to continue to grow by 10%-12% over the next three-to-four years.
He noted that Asian equities may consolidate in August-September. “But the underlying growth is there, so we will be using [a market decline] to add to positions.”
China and Korea
Within Asian markets, Taylor finds the most value in Chinese and Korean companies because of their higher risk premia, partly caused by political risk.
On a forward P/E basis, Korean equities are the cheapest among the Asian equity markets, having a P/E ratio of 9.3, followed by Chinese equities (11.9), according to a JP Morgan Asset Management weekly report.
“In China, [risk] has always been in the banking system and its debt, and in Korea, it has always been corporate governance,” he said. However, there is evidence that both of these risks are disappearing slowly.
For example, the Chinese government has managed to tighten liquidity and keep leverage out by targeting so-called wealth management products (WMPs), according to Taylor.
In China, WMPs are investments usually managed by banks that offer fixed rates or return well above regulated interest rates for deposits and are often used to fund investments in sectors where bank credit is restricted.
Within Chinese equities, Taylor prefers Hong Kong-listed H-shares over onshore-listed A-shares because they are cheaper and the H-share companies have better transparency. He also believes that H-shares will outperform the Hang Seng Index.
However, he noted that the discount is narrowing between the two. In addition, A-shares are looking quite cheap relative to history.
In Korea, corporate governance is also starting to improve. For example, the government has legislated that companies may be taxed more if they do not incentivise their shareholders adequately. The law has encouraged companies, especially family-owned conglomerates called chaebols, to pay dividends to their shareholders.
The one-year performance of the MSCI Asia, Hang Seng and S&P 500 indices, according to data from FE Analytics.
