Ayaz Ebrahim, JP Morgan Asset Management
On a price-to-book basis, the region is trading slightly below its long term average.
“We are not looking at stretched valuations, but we are no longer looking at cheap valuations,” Ebrahim said at a recent media briefing in Hong Kong. “So what’s key going forward is looking at earnings for 2018.”
Investors saw a rally in Asia-Pacific equity markets in 2017. Last year, the MSCI Asia ex-Japan Index was up 35.8%, according to data from FE.
Ebrahim attributes the performance of the Asia-Pacific market to earnings. “The bulk of the performance last year is driven by earnings and it’s not a big re-rating story, although we had some re-rating.”
Five months ago, the earnings forecast was around 8%, but now we’re looking at 12%. I wouldn’t be surprised if it gets upgraded in the range of 14-15% through the year.
He is still positive on the region’s equity markets in 2018. The consensus forecast for earnings this year is 12%, and the good news is that these earnings forecasts could be upgraded further, he said.
“Four to five months ago, the earnings forecast was around 8%, but now we’re looking at 12%. We continuously see earnings upgrades and I wouldn’t be surprised if it gets upgraded in the range of 14-15% through the year.
Ebrahim also noted that although earnings were led by technology companies last year, other sectors such as financials, industrials and materials are starting to perform better as well.
“What we are seeing is a broadening of performance across sectors for Asia in 2018.”
He added that the weaker US dollar should be a positive tail wind for Asian equities.
Within the the region, Ebrahim is positive on China’s new economy stocks, such as e-commerce.
E-commerce companies are now using big data that enables them to know more about their customers’ purchasing behaviour, which can make them more profitable.
“We believe the e-commerce space will continue to grow very strongly despite [already] strong equity market performance by these companies.”
Ebrahim also favours Korea, which is still one of the cheapest equity markets in the region with a price-to-earnings ratio of less than 10x. “Despite very strong earnings growth last years, the market is still cheap.”
He noted that the reason behind the low valuations is not a result of the political situation with North Korea, but because of the lack of transparency and corporate governance in general.
“Corporate governance is deemed not to be ideal as it could be, and while other countries have moved forward along this, Korea has lagged.”
However, Korea has introduced a corporate stewardship code and the government has an initiative to improve corporate transparency. In addition, the country’s National Pension Service is also pushing companies to be more transparent.
The National Pension Service is the fourth largest pension fund globally, with $462.16bn in assets as of the end of 2016, according to data from Willis Towers Watson.
“If the National Pension Service starts pushing more corporate transparency, we will see a re-rating of the Korean market, but it’s not going to happen overnight. It’s a gradual process, it’s still cheap and earnings growth in Korea is still double digit in 2018.”
Ebrahim also likes banks in the region that are embracing fintech solutions, such as those that make use of mobile payments, and the e-commerce sector in the region as a whole.
One of the firm’s Asia-focused fund, the JPMorgan Asia Growth Fund, which is managed by Hong Kong-based Joanna Kwok and Mark Davids, has China, Hong Kong, India, Korea and Taiwan as the top five markets in terms of the fund’s country allocation, according to the fund factsheet.
By sector, IT has the largest weighting, representing 32.9% of the portfolio.
Top five country weightings
|Top five sector weightings|
China – 37.8%
|Information technology – 32.9%|
Hong Kong – 12.3%
|Financials – 31.1%|
|India – 11.2%|
Consumer discretionary – 18%
|Korea – 10.5%|
Consumer staples – 5.2%
|Taiwan – 9.8%|
Net liquidity – 4.5%
The three-year performance of the JPMorgan Asia Growth Fund versus its benchmark.