What were the major recent events and impacts on your asset class?
In the third quarter, the MSCI Asia ex Japan index declined 3% amid the concerns over the ongoing slowdown of the Chinese property market, as well as high interest rates in the United States. Among the major markets, we saw that India, Malaysia and Singapore delivered good performance in the quarter, while Korea and Taiwan underperformed, mainly due to the slow technology demand so far this year. And in China, the weak sentiment is keeping the China equity at very low valuations. The sentiment is weak due to the soft economic growth momentum, the real estate drag, as well as the ongoing China-US rivalry. In addition, the policy stimulus has been below expectations for many investors. In our view, the Chinese government wants to support the economic growth in the short term, but they want to avoid issuing large stimulus, which could lead to asset bubble and high inflation down the road. And despite high valuations, we saw that investors continue to favour India as it is seen as a key beneficiary of the supply chain relocation.
What can your asset class offer in the current environment?
Today, we believe Asian equities offer attractive secular growth combined with attractive valuations. China and Asia remain a key driver for the global economic growth. The International Monetary Fund data shows that this year, 70% of the global economic growth will come from Asia, with China contributing about 30% of the global growth and India contributing 15%. And despite being the key growth driver, valuations in Asia and China remain very low. When we look at the MSCI China Index and the MSCI Asia ex Japan Index, we can see that both indexes trade at very low levels and the capital flow into Asia has been very weak and the region has been quite oversold. And right now, we see many investment opportunities in Asia and China.
The technology cycle is bottoming out in Asia and AI is showing up as a timely catalyst. And in the portfolio, we have exposure to companies with exposure to AI, not only in semiconductors but also in the internet space. Another area that we like very much is the reopening theme, particularly related to travel. We have seen strong travel rebound in Asia and we believe the trend is sustainable. And finally, clean energy is an area that we're actively looking for opportunities, especially after the strong stock price correction in this area over the last 12 months. Today, we see attractive entry points to some of the leading clean energy names.
What is your outlook in the near and medium term?
In the short term, particularly in the last month, we are seeing improvements in some of the key economic numbers in Asia and China. For example, manufacturing PMI has started to improve in China, Korea and Taiwan. This indicates that the manufacturing sector is stabilizing in the export oriented Asian economies. And in the meantime, the PMI number in India and Indonesia has eased from very elevated levels, but they remain firmly in the expansionary territory. And for China, given the countercyclical nature of the Chinese policy, we expect to see further supportive policies for the real estate sector as well as for the overall economy. This will be necessary to help sentiment improve on China. This year, we have already seen a number of supportive measures from China, including mortgage rate reductions and the removal of some home purchase restrictions, and Chinese homeowners remain in good financial health, with the mortgage delinquency rate at a very low 1.2% in 2022. And for the troubled real estate developers, we believe the speeding up of the bankruptcy process and the liquidation process could help the real estate sector go back to a healthy state.
And in our view, the more reliable catalyst for Asian equity this year would be earnings growth. Looking at earnings growth, the fastest earnings growth this year is expected from the service sector, thanks to the post-Covid recovery. And we continue to see many of our portfolio companies delivering good earnings results. Some of these good results have been so far ignored by the markets and not yet reflected in the stock prices, but we have also seen some stocks reacted positively to the earnings growth and have staged a sustained rally from the very low level. In the short term, the stock prices are driven by perceptions, in the long term, earnings growth drives stock prices. We believe that it is a matter of time before investors notice the good earnings coming from some of the Asian companies.
Is there one chart you’re currently monitoring closely?
Currently we are tracking the US dollar index on a frequent basis. Historically, the US dollar index has a strong negative correlation to Asian equity performance. When the US dollar strengthens, the Asian equity performance tends to be poor. And when the US dollar weakens, Asian equity performance tends to be strong. Recently we have seen a rally in the US dollar, and this has weakened the appetite for Asian equities, as high interest rates in the US makes the US dollar-based assets more attractive to investors and dampen the demand for non-US dollar assets. But on the other side, the weak Asian currencies creates a tailwind for Asian exports and make Asian products more competitive and increase the demand for Asian products. And when we see a pause of the US dollar strength, we think that could be a very strong catalyst for Asian equity to perform better.
Andrea Quapp highlights the fact both stocks and bonds are currently attractively rated, which is presenting her with asset allocation opportunities. She also mentions the importance of innovations such as artificial intelligence and, specifically for Switzerland, the appeal of the Swiss real estate market.
Christian Munafo of Liberty Street Advisors notes an improvement in market conditions for investors in late-stage private companies; many of these companies are similar to what public market investors used to seek in small to mid-cap growth stocks. He also stresses that many of them are not just high growth, they are also at or approaching profitability.
Goro Takahashi describes the key factors that influenced the Japanese market over the third quarter, particularly the main stock exchange’s ongoing initiative to improve listed companies’ financial indicators, and the areas he thinks investors should focus on into the turn of the year.
Julian Howard reflects on the combination of stretched valuation and a tight equity risk premium that has made equities less attractive in the short term. However, it does not undermine the very long-term case for equities, in his view. He also notes the long-term structural case for China.
GAM Systematic’s Dr Chris Longworth and Guglielmo Mazzola highlight bond sell offs and a commodities rally as significant market events, and note that systematic investment approaches can help provide investors with much-needed diversification for their portfolios.
Atlanti’s Gregoire Mivelaz highlights the three major events of Q3 that impacted his investment universe: earnings, bond call dates and the reopening of primary markets. He believes given we are now in a late credit cycle, credit quality matters for investors. And he notes that market mispricing is continuing to lead to opportunities.
Jian Shi Cortesi notes that weak sentiment in China is keeping Chinese equities at very low valuations, due to the soft economic growth, real estate drag and the ongoing China-US rivalry. However, she is optimistic about long-term prospects, with the conviction that in the long term earnings growth will drive stock prices.
Niall Gallagher shares his views on the implications of rising real bond yields and why he thinks central banks will continue to have to fight inflation rather than deflation. Niall also discusses the sheer scale of capital required to enable the energy transition, and some of the companies he believes stand to capitalise.
Jian Shi Cortesi, Investment Director, Asia/China Growth Equities, delves into the intricate dynamics of Chinese and Asian equities. She focuses on the impact of manufacturing shifts, India’s emergence and the potential parallels with Japan’s economic trajectory.
China is not without its problems, but, given the sheer scale of opportunities, warrants far more than peripheral market status for equity investors, argues Jian Shi Cortesi. She believes investors should look through the lingering anti-China haze and instead focus on the powerful longer-term growth story.
Following China’s Golden Week holidays, GAM Investments’ Jian Shi Cortesi and Fanwei Zeng reflect on the country’s latest developments in tourism and consumption, and how the trend towards experiences is set to create investment opportunities.