Outlook on the Asian markets

Tuesday, 28 July 2009 10:22

Following the publication of China’s GDP figures on 16th July, Geoff Lewis, Head of Investment Services with J.P. Morgan Asset Management, Asia, analyses the current situation

Asian stock markets have sustained their uptrend in recent weeks, albeit slowing slightly from their sharp rally at the beginning of June. Investor risk appetite remained elevated on stabilising economic data and hopes that the worst had passed for the global economy.

Portfolio inflows are coming back to Asia, though so far we have seen the return of only a fraction of the money that left the region in 2008. From an earnings growth perspective, Asian equities look attractive relative to other regions. In the short term the global liquidity theme will continue to support regional stock markets, as the monetary policies of the G7 central banks are expected to remain loose in the second half of 2009. Although we believe the lows for Asian equities were seen in March, we may also have seen the best part of the recovery rally in the past three months. Regional valuations are fair but no longer particularly cheap, and though earnings momentum has improved recently the outlook for profits in 2010 remains uncertain. It would not come as a surprise to see a period of consolidation/range trading in markets over the summer. We think stock selection will be key in this environment. Although there could be some trading opportunities in heavily oversold Asian cyclicals, our strategic preference is to stick with domestically-oriented stocks in preference to exporters.

In Japan the economy looks to be bottoming and the question now is whether recovery can gather momentum. Monthly data points to strong second and third quarter GDP numbers driven by a rebound in the manufacturing sector on account of inventory restocking, but beyond that the outlook for domestic final demand is cloudy. We do not expect to see much improvement in Japanese exports to the US or Europe in the near term and so China’s economic recovery is also the key to Japan’s own economic outlook. Many Japanese companies are trading at historically low valuations. In our portfolios we are looking to increase exposure to companies with higher operational gearing to a reviving economy.

This outlook follows a month of mixed fortunes. Throughout June, improving credit markets and more easing measures from central banks helped support global equities and other risk assets. Commodity prices continued to see gains, with oil prices rising to USD73 per barrel – an eight-month high. Regional stock markets welcomed more positive economic data from China that pointed towards a sustainable recovery. Industrial production and FAI for May came in above consensus, for example, while new RMB bank loans have not been reined back as some feared but have continued to rise. Total RMB bank lending was over 30% higher yoy in May. Chinese A-shares performed particularly strongly in June, as did Indonesia and Thailand, where foreigners continued to buy. Performance in the rest of the region was more muted, with Korea and Taiwan seeing profit taking following their out-performance earlier in the quarter. In Australia the banks continued to lead the market higher, as did consumer stocks which benefited from the government’s fiscal stimulus package. After earlier strong gains India took a breather in June as MSCI India fell 2%. Foreigners and domestic mutual funds continued to be net buyers, but equity issuance was an overhang with a slew of offerings in the pipeline. Preliminary signs of a trough in economic activity are becoming visible in India’s economic data, but the federal budget disappointed investors due to its lack of detail on measures to cut the fiscal deficit.

Japan’s Topix rose 3.5% in June. The best performing sector was securities & commodity futures, whose earnings benefit from the rebound in the market, followed by glass & ceramic products and textiles & apparel. The worst performance came from marine transport due to the decline in global shipping rates. May industrial production and export volumes continue to show rapid improvement. Since bottoming in February, production has increased by 4.5% mom on average. Stronger exports, especially across Asia, are the main driver of improvement.