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Q&A: Chinese and Asian Equities in 2019

12 February 2019

As we enter the Chinese New Year of the Pig, Jian Shi Cortesi, portfolio manager at GAM Investments, believes that Chinese stocks could bring prosperity in 2019 but warns careful stock selection will be key.

How do you think Chinese equities will perform in 2019?

We believe Chinese equities’ earnings growth is likely to be in single digits in 2019. P/E will be driven by sentiment - if sentiment turns from “very negative” to “less negative”, it could be enough for Chinese equity P/E to rebound from the current low level. Putting these two factors together, I am optimistic on Chinese equities in 2019. In addition, Chinese equities started 2019 with a dividend yield in the range of 2.5%-3.0%. Since 2001, when the dividend yield was at this level, 80% of the time the MSCI China index delivered positive returns over the following 12 months. Of course, careful stock selection will be key.

What is your view on the US-China trade war? Do you think that we could see a resolution this year?

A drawn-out trade war continues to hurt both countries, so I think both sides are motivated to reach a resolution. However, any negotiation is difficult to predict. Nevertheless, even in the absence of a full resolution, we believe any progress in the trade talks would be positive for China and Asian equities.

In terms of Asia as a region, which countries do you have the most positive outlook for equities on and why?

We have started 2019 with a positive view on China. Many negative factors, such as the trade war and slower growth, are well publicised and now priced into Chinese equity prices in our view; valuations have come down to very low levels at the beginning of 2019, at 11x forward P/E including internet stocks and at 8x forward P/E without. In addition, the Chinese government has started to support the economy more actively. We also believe any progress in the US-China trade negotiations will be a catalyst for Chinese stocks. From a bottom-up perspective, many Chinese stocks de-rated dramatically in 2018 as investor sentiment made a 180 degree turn from bullish to bearish. Stock prices, as a result, have come down and are beginning to look very attractive.

Overall, North Asian markets (Korea, China/Hong Kong and Taiwan) are trading at lower valuations compared to India and South East Asian markets where they are richer.

Which countries do you think there is a negative outlook for?

We currently have no strong negative view on any Asian countries. We are slightly less bullish on South East Asian markets based on valuations, however we typically have lower exposure to these markets.

What are the key themes/sectors for equity investing in 2019?

Chinese internet remains one of the most interesting investment themes in Asia. After a spectacular performance in 2017, many Chinese internet stocks fell dramatically in 2018, paving the way for the next rally. We feel it could also be a good time to start bottom fishing in the wider Asian automobile industry and Korean consumer sector, both of which faced strong headwinds in 2018 and experienced significant stock price declines.

What are the main risks to the Asian equities rebounding in 2019? What are the external uncertainties facing Asian equities?

In 2019, US and China trade tension will likely continue to be a major risk (as well as a potential opportunity). Another major risk is the direction of the US equity market. If we see a large correction in US stocks, we believe Asian stocks could also decline due to the high correlation between the two regions.

How will US monetary policy affect Asian equities this year?

If US rate hikes come to an end in 2019, it will likely relieve the pressure on Asian countries to also raise interest rates to support currencies. Therefore an end of the US rate hike cycle will likely be very positive to our performance and stock markets in our view.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.
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