Aviva Investors’ Xiaoyu Liu is relatively optimistic about the outlook for the Asia Pacific region but with a notably caveat when it comes to China.
The fund manager for emerging market and Asia Pacific equities says the region’s equities are attractive because they are cheap with supportive fundamentals.
‘The MSCI All Countries Asia ex Japan index has risen more than 15% from its low in January and many of the factors that drove the market lower have receded,’ she says. ‘The Fed has put interest rates on hold and oil prices have increased.’
In addition, she says, foreign exchange fears have faded in China, which is still the largest market in Asia, as capital outflows reduce and credit expansion and fiscal stimulus feed through to improved economic growth.
However, there is still plenty of potential upside for investors. ‘Year to date, Asian equities have only gained 1%,’ she says. ‘Valuations remain cheap compared with their own history and to global equity markets.’
Liu stresses that the rebound has so far been supported by currency appreciation and valuation expansion, although she points out that the market is also starting to see earnings upgrades, while oil and commodity prices are higher.
‘The Chinese government’s pro-growth policy has been effective and economic data has started to pick up,’ she says. ‘We are seeing improvements in the earnings outlook for companies in China and in the region as a whole.’
China at the core
While there are a number of countries within Asia that are growing in importance, Liu maintains that China is key to the outlook for equities as both the region’s largest market and one of the biggest trading partners with other economies.
‘Together with Hong Kong, where many of the listed companies are actually Chinese and the rest are heavily influenced by the mainland economy, China is more than 40% of the MSCI All Countries Asia ex Japan index,’ she says.
‘For Korea, exports to China constitute more than 30% of outbound goods and services and nearly 14% of GDP, while for Taiwan, it is nearly 40% of total exports and more than 25% of its GDP.’
However, while high GDP growth from China is positive for Asian equity markets, she says that current credit fuelled growth is at the expense of structural economic reforms. In addition, the country is also increasing debt on top of already high levels.
‘China has a total debt-to-GDP ratio of 240%, the highest in the emerging markets,’ she says, adding that many other Asian economies are also highly leveraged.
‘The risk of a near-term crisis is low, but history tells us that debt cannot continue to grow at this rate without causing a problem.’
These comments originally appeared in a supplement published with the June edition of Citywire Selector magazine.