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Is it time to invest in Asia again?
By Andrew Swan at BlackRock | Wed, 13th April 2016 - 10:31
A review of the past 40 years suggests that whenever Asia ex Japan markets trade between 0.9 and 1.4 times price-to-book, investors have subsequently benefited from strong markets for 80 to 90% of the following 12 or 36 months.
This trend can be identified through the various crashes and sell-offs that Asia has experienced over the past 40 years, not least the 1997 financial crisis. As Asia ex Japan markets are currently trading around 1.2 times price-to-book, starting to recover from January's lows, we think there is a compelling case to invest now.
So how can you tell if Asian equities are a bargain or a value trap? Over the past three years, I would have suggested the latter. Asian stocks looked cheap, yet this proved illusory, as companies faced pressures on profits as a result of slowing nominal GDP growth and margin pressure.
Opportunities in China
The region thus failed to meet expectations and developed markets have broadly outperformed Asia and emerging markets as a result.
What has changed? We are not expecting earnings to recover dramatically, but valuations at these levels suggest that stocks look oversold.
We believe there is better alignment amongst central banks - following the Bank of Japan's unsuccessful attempt to go it alone with the introduction of negative rates - which can provide further support.
Fears in India have been overplayed and Narendra Modi is driving reform in certain sectorsMeanwhile, the recent weakening of the dollar gives Asia some breathing space to implement the right mix of monetary and fiscal policy and bolster growth.
We are still finding opportunities in China, ranging from growth companies in the e-commerce space through to value stocks that can benefit from supply-side reform. Energy companies since the recent fall in the oil price offer good value in our view.
Similarly, we believe fears in India have been overplayed. Although it is one of the more expensive markets and there is scepticism due to the political log-jam, if you peel away the surface, you can see Narendra Modi is driving reform in certain sectors.
Positive initiatives are underway in the energy sector, for example. Around 300 million Indians still do not have access to electricity.
So the authorities are removing the log-jams to ensure there is enough coal supply to boost generation capacity. Elsewhere in the country's stockmarket, we like autos and telecoms.
Positive on Indonesia
We are also positive on the Indonesian market, where we believe growth resilience and a renewed commitment to reform can help extend its recent recovery.
In our experience, the stocks that have been hit the hardest after a sharp sell-off tend to bounce the most in a recovery. Investors have crowded into defensive stocks over the last year - but we believe a change of tack is now necessary on valuation grounds.
Our risk team have found that quality stocks are at 15-year valuation highs, while the reverse is true for value stocks.
Asia needs a new growth model. It must be more self-reliant and develop its own engines of growthSelectivity is crucial though - at both a stock and country level. We think Korea and Malaysia still have a number of structural issues to resolve.
So where to from here? Asia and especially China is at a crucial juncture. Growth expectations are slowing and the Chinese authorities face a challenging path ahead.
What matters from here is the implementation of reforms and getting the currency under control in the short term. But, overall, we expect growth to pick up over the next six months, and hopefully this will surprise markets on the upside.
Most importantly, Asia as a whole needs a new growth model. It must become more self-reliant and develop its own engines of growth for the next decade.
This doesn't necessarily spell a downturn, as the doomsayers will have you believe. With valuations where they are, we expect to see further upside.
The author, Andrew Swan, is head of Asian equities and portfolio manager of the BlackRock Asia and BlackRock Asia Special Situations funds.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.