It is Chinese tradition to give lai see or red packets as a blessing on special occasions. With Chinese New Year less than a week away, AMP Capital has its own lai see for Asian equities investors in order to bestow good luck on them for the year ahead.
AMP Capital Head of Asian Equities Patrick Ho said: “The Year of the Goat is traditionally a time of calm and steadiness. While markets are often anything but peaceful, growth prospects for the Asian region (excluding Japan) aren’t expected to deliver any major surprises in 2015.
“While there are headwinds, emerging markets will remain key economic growth areas compared to the developed world for the foreseeable future. Asia is a strong choice for investors because local markets are largely in a better fiscal and productivity position compared to non-Asian emerging markets such as Brazil and Russia.
“With the Aussie dollar expected to weaken further, Asia is an ideal investment destination for Australian investors. An allocation to China A shares can also help reshape and enhance the risk-return profile of a portfolio by offering much-needed diversification. In addition, the China A share market is very much driven by the domestic market so Australian and overseas investors could benefit from identifying the gems that would normally be overlooked by local investors.”
AMP Capital’s Asian equities lai see, forecasting good tidings in the year ahead, are as follows:
Asia is reforming
There is barely a country in Asia that is not undertaking reforms. In China, the government is targeting corruption, overcapacity and capital market reform. In Korea, the attention is on dividend payouts and holding company structures. In Thailand, energy prices are under the spotlight while in Malaysia, the focus is on electricity prices, fuel subsidies and the goods and services tax (GST). India and Indonesia are both looking at fuel prices with India also considering GST and foreign direct investment reform and Indonesia tackling corruption.
Mr Ho said: “All these efforts will have a positive impact on markets as better transparency and higher governance lead to stronger inflows of funds. They should also drive a re-rating of the overall market valuation as a result of stronger return on equity from improved capital allocation; high dividend payments, which are associated with higher valuation multiples as investors pay more for the certainty of returns; and better corporate governance and incentive structures for management, which have been shown to command higher multiples.”
ASEAN is improving
Most of the ASEAN economies have experienced improvements in their current account balances including Indonesia, which is in deficit. Foreign capital is also having less of an influence due to the growth of domestic retail and institutional capital and this is helping to lower the volatility typically associated with these markets.
Mr Ho said: “Thailand is a perfect example of the declining influence of foreign capital. Foreign participation in Thailand has dropped to near its trough levels since the military coup in late 2013 yet the Stock Exchange of Thailand Index has been one of the best-performing markets in ASEAN this year, up 24 per cent year to date. The retreat of foreigners has been more than offset by optimistic local capital driven by the growth of mutual funds, take-up of insurance products and a high savings rate.”
Back to ‘normal’ for China
China has been criticised for its slower growth momentum post the 2009 stimulus package. Since then, the market has been priced at a valuation discount given the great fear of a ‘hard landing’ and a ‘credit boom’. During the last two years, and under a new leadership, the focus on issues such as corruption, cracking down on unlimited liquidity supply and financial reform/openness have increased governance and has been positive on markets, and this has eased the unexpected downside risk. As a result, and as evidenced in the fourth quarter of 2014, the market has been able to pull back on its deep discount and revert to more normal levels.
Mr Ho said: “The Chinese market will likely benefit from improving sentiment as well as MSCI’s expected decision to add China A shares to its emerging market indices. The decision, expected in the second quarter of 2015, follows the smooth implementation of Hong Kong-Shanghai Stock Connect late last year, which has addressed MSCI’s concerns about market access.”
India: the lucky market of 2015?
India has an energetic new Prime Minster in Narendra Modi and a strong Central Bank Governor, Raghuram Rajan, who has eliminated much policy uncertainty that concerned investors during the last few years. The decline in oil prices will also help the country’s current account deficit and inflation is falling as well, which could spark off an easing cycle.
Demographics are on Asia’s side
Mr Ho said: “Moreover, India has a unique economic cycle compared to the rest of region, which usually provides good diversification. The upcoming decade will also see a boom in investment in infrastructure and urbanisation. One could argue India may follow a similar path to China during its growth cycle.”
Broadly speaking, Asia remains the investable region with the youngest population. There is also a growing middle and upper class in Asia, which is resulting in more people with money and a willingness to spend it. This is expected to spark a consumer boom similar to that experienced by the US in the 1980s.
Mr Ho said: “The China A share market has higher exposure to the consumer and health care sectors compared to overseas markets that offer Chinese shares such as Hong Kong’s China H market. This means it is ideal for investors looking for exposures that benefit from Chinese economic growth and demographic shifts, both of which are linked to domestic demand. The industrial sector in China is also gaining core competencies to export its products and services to the rest of the world. Such an uplift of China’s exports will offer investors a different set of sweet spots compared to those of the previous cycle, which were banking, energy and telecoms.”