Patrik Schowitz, JP Morgan Asset Management
Although JP Morgan Asset Management (JPMAM) remains overweight risk assets, it is wary about the prospects of Asia equity markets after a strong performance in the first few months of this year.
“China is of course central to this call, as it is by far the largest market in the region,” said Patrik Schowitz, global multi-asset strategist, in an update of his team’s asset allocation.
Chinese growth recovered before any of the other major global economies and entered “cruising speed”, while US and now Europe have still been re-accelerating.
The “good enough” level of growth is now enabling Chinese authorities to tackle the problems that they see in the financial system and other regulatory areas, according to Hong Kong-based Schowitz.
“This is almost certainly the right thing to do in the long run, but likely a headwind to Chinese equities for the time being,” he said.
Schowitz also pointed out that other major emerging market Asia markets, such as Korea and Taiwan, had already performed very strongly, and are “due for a pause,”.
Part of the problem, is that emerging market Asia equities are growth-heavy, largely because of the dominance of the Chinese internet sector, and JPMAM is favours value and cyclical stocks over growth counters.
“Apart from any regulatory issues, in this current macro environment of strong growth and rising bond yields, we think value-type markets are likely to perform better,” said Schowitz.
He also warned that Asia might lag behind other regions Covid vaccinations, despite a faster take up in China recently.
“This would however mostly hit the smaller economies in the region where tourism is important, while it is unlikely to hit North Asian export performance much,” said Schowitz.
Earnings growth
Elsewhere, JPMAM’s preference for cyclical and value stocks means that it is overweight Europe, the UK and Japan, while cautious on emerging markets in general and US large cap equities.
Although much of the economic data is flattered by year-on-year comparisons with Q2 of 2020, Schowitz believes that the global economy is close to maximum acceleration.
“Historically, when we go past that point, returns for risk assets become more modest, and the risk of corrections rises,” he said, yet acknowledged that the peak is likely to be more drawn out than many appreciate, with growth topping out in the US now, Europe a few months behind, Japan even later.
However, Schowitz thinks that a major correction to equity markets is unlikely, which is why his allocation is net-positive on risk assets.
“We think the risk of a serious correction is probably lower than history suggests, given that the risk of recession is much lower currently than at many historic growth peaks, partly due to the still-huge policy support,” he said.
Moreover, he suspects that analysts and investors are underestimating the potential for earnings growth this year and next, despite expectations for earnings growth globally and in the US of around 30%.
“Looking at historical relationships between GDP and EPS growth suggests it could be a lot higher than that, and this still needs to be reflected in further earnings forecast upgrades,” said Schowitz
“Again, that gives us some more confidence in a risk-on stance, despite peaking economic momentum and markets that have already run a lot,” he added.
