Sean Taylor, DWS
Local investors supporting the markets matter across Asia, Taylor said at a media briefing in Hong Kong, citing examples in China and India.
“One good example of local buyers is the amount of money brought to Hong Kong via the southbound Stock Connect.”
On average, mainland investors’ weekly southbound net purchase of Hong Kong-listed stocks is $736m over the past year.
The considerable Hong Kong stock market outflow this week was due to short-term negative sentiment, he said. The southbound investor participation should remain active over the medium term, he believes.
In India, the government’s effort to revamp tax policy is freeing up domestic investible capital, which is pouring into investment products, Taylor said.
“Before the government’s monetary reform in India, there were no real domestic investments. Now the inflow to mutual funds is strong and the flows continue through the volatility.”
Taylor holds a positive outlook in earnings growth pickup across Asia, which will lead to a re-rating in the price-to-earnings ratio in Asian equities markets, he believes. In the medium term, he expects they will trade at a premium relative to other emerging markets and to Europe.
Among Asian equity markets, the firm is overweight in China, neutral on India and Thailand, and underweight in Taiwan, Korea and Southeast Asia.
He explained the overweight in China mainly comes from the earnings upgrades in the sectors with domestic-oriented companies and reasonable stock valuations, such as the consumer sector.
China concerns
July is going to be an important month for China, he said. On 6 July, there will be a confirmation from the US on whether the tariffs will be imposed, and two weeks after that China’s domestic GDP figures for the first half will be published.
Moreover, Taylor is watching the trade negotiations between the US and China and the possible impact on China’s deleveraging process.
As China’s leaders focus on the negotiations with the US, financial deleveraging may slow in next couple of months, Taylor said.
“The onshore stock markets will soon start to factor that in.”
Negative sentiment toward Chinese stocks, however, has created an opportunity to hunt for undervalued stocks, he said.
“This is the time when you get opportunities to buy fundamentally good companies when the market sells off. When Trump started talking about blocking Chinese enterprises investing in technology in US, there was a huge sell-off in US-listed Chinese company. Some of these stocks have got nothing to do with trade. For example, Chinese education stocks listed on the Nasdaq were down around 10%.”
The intensifying US-China trade frictions may put downward pressure on China’s current account surplus and the renminbi, he said.
However, China’s authorities will not depreciate the yuan because a stable currency is one of the key elements in economic reform, Taylor believes. Officials will instead encourage domestic demand by further reducing the reserve requirement ratio of banks, which should ease any negative economic impact resulting from trade tension.
He said the more open economies in Asia, such as Hong Kong, may ultimately be affected more than China by the tariffs because of a comparatively bigger exposure to external trade.
But it will not translate into capital outflows from the Hong Kong stock market because the local benchmark Hang Seng Index is more linked to property, utilities and financials than to manufacturing and trade, he added.
