A pullback in Asian equities looms after a stellar start to the year, according to fund managers, who remain bullish for the longer term thanks to cheap valuations and optimism that the region will benefit from improving global growth.
While managers see strong fundamentals, they ticked off several risks that may weigh in the second quarter, from French elections and Brexit to U.S. interest rates, as well as Donald Trump’s stance on protectionism and his ability to steer his agenda through Congress.
“We are cautiously optimistic, but there a lots of things that could upset this benign environment,” said Paul Danes, chief executive of Martin Currie Asia, a subsidiary of Legg Mason. “There will no doubt be persistent concerns about what President Trump says and does, and how this will be reflected in policy. We can think of plenty of disaster scenarios, and in such an event there will be few businesses untouched.”
The MSCI Asia Pacific Index jumped almost 9 percent from January to the end of March, its best return since the same period in 2012. It was up 0.2 percent at 9:45 a.m. Monday in Hong Kong, kicking off the second quarter higher, along with markets from Japan to Australia. India’s Sensex advanced the most in the region in the first quarter, rising more than 11 percent to a record high. Japan, pressured by a strengthening yen, had the poorest showing among major markets, as it slipped to a loss on the final day of the quarter.
Here’s what some investment managers had to say in recent interviews with Bloomberg about the quarter ahead:
Anthony Ho, Amundi Asset Management
- The Trump administration is still a big uncertainty for Asia, especially on trade policies and the relationship with China. Trump’s meeting with Xi Jinping is “the key event” for this quarter.
- NOTE: Trump and Xi to meet in Florida on April 6 and 7.
- Short-term investors may take some profits in the coming months, creating more volatility.
- Earnings expectations are being revised upwards, with strong double-digit growth rates in countries such as China, India, Indonesia and Korea.
- The commodity rally should continue on overcapacity reduction in China and elsewhere. This should filter into equity markets, especially energy and material names that have underperformed over the last few years.
Andrew Gillan, Henderson Global Investors
- Brexit and issues with the European Union are still risks. Also awaiting clear policies from Trump, especially since he couldn’t get health-care changes through.
- Consensus is that China’s economy has stabilized, but there are issues with debt.
- Asia is attractive compared to the U.S. and Europe as valuations are at a discount. There’s a high probability of more than 10 percent earnings growth for Asia ex-Japan this year.
- More than 20 percent of Gillan’s portfolio is in India. Also likes Taiwan, with a mixture of technology including Taiwan Semiconductor Manufacturing Co. and companies involved in Apple’s supply chain.
Arthur Kwong, BNP Paribas Investment Partners
- It’s unlikely there will be the same robustness in Asia ex-Japan equities this quarter, but there is support given the steep discount to U.S. stocks.
- Elections in France and Germany pose potential risks, while Brexit negotiations should dominate financial news headlines.
- Prefer India and Asean over the longer term given their working-population growth, lower penetration of products and services, and rising disposable incomes. Concerns about current account deficits are valid but overdone.
- Cautious on China due to its rapidly deteriorating demographics, rising labor costs and oversupply issues.
James Soutter, K2 Asset Management
- Election concern has died down as Dutch polls went through “without issues” and French election risk is diminishing. The other political risk is Trump and whether he can get policies through.
- Asian markets are volatile, especially with more U.S. interest-rate moves likely this year. “There will be volatility around those interest rates and dollar movements.”
- Adding positions in technology and Asian financials, especially Hong Kong insurers and banks, latching on to global growth. There are some opportunities in South Korea, which was sold off heavily toward the end of 2016.
- Avoiding Hong Kong and Singapore property companies.
Shane Oliver, AMP Capital Investors
- A pullback of maybe 5 percent is likely in the second quarter because the market has had good gains.
- There is risk around U.S. policies on trade, and tensions with China and the South China Sea. Also North Korea, “but we’re always worried about that and have been for 20 years.”
- Company earnings in Asia, emerging markets, Europe and Japan should outperform the U.S.
Alan Richardson, Samsung Asset Management
- Issues in the West remain a risk, including the magnitude of U.S. interest-rate tightening, European politics and Brexit.
- Volatility will stem from profit-taking after a strong year-to-date performance and lack of new leads to trigger a fresh round of buying over the next three months.
- Market is unlikely to fall back more 10 percent, so investors can use declines to progressively buy more.
- “I don’t see any new unexpected developments, so it is just a repetition of continuing issues which the market is mostly aware of, so it is already mostly discounted.”