The state of the rally in Asia’s markets
The rally in Asia’s markets continues and over the last couple of weeks, it has been broadening somewhat. At the beginning , the rally was more focused on some of the cyclical sectors, in particular, commodities, raw materials and energy. Other more secular growth elements of the market failed to keep up.
However, in the last few weeks, that seems to have changed, which is good news for two reasons. First of all, our portfolios tend to be more focused on the secular growth stories in Asia. Secondly, it seems to suggest that the rally has a little bit more depth and a little bit more sustainability to it from a technical point of view.
We are somewhat skeptical about the rally in commodities. For one thing, very high valuations in these sectors and for another thing, the massive build-up of iron ore inventories in China, without much more in the way of stimulus and fixed asset spending. Additionally, we had some slightly more cautious comments coming out of places like Australia, where some of the miners worried about the sustainability of prices and the degree of speculation that was going on in the commodities markets.
One thing that might help the rally sustain itself is more aggressive restructuring in, for example, China’s coal mines. We expect that reform will develop at a gradual pace in order not to create too much social disturbance.
We see the main story in China as being about the consumer, about the fact that two-thirds of global middle-class spending will come from Asia in the year 2050 and finding the businesses that will benefit from that. That remains the core of what we do.
Key factors that are driving world markets
As far as the factors that have been driving markets across the world higher are concerned, there is a difference between what drives markets in the US and what drives markets in Asia. For the first time in a while, what drives the markets in Asia tends to be more tangible in nature than what drives the markets in the US.
In the US, although the market continues higher, the expectations of infrastructure spending have diminished. Tax cuts have been delayed by arguments over the new health care policy to be put in place, which leaves the market’s rally sustained on expectations of deregulation. It is still not clear how much of an impact that will have on companies and whether it will be realised or not, whereas in Asia, there are quite a few tangible things worth mentioning. Earnings growth improve in the region.
In China, for example, large special dividends gives some hope for state-owned enterprise reform and more governance reform. The impeachment in South Korea and the arrest of a very high-level heir to a corporate fortune suggest that the South Koreans are getting tough on tackling corruption and bribery at the highest levels and also focusing on corporate governance at the same time.
In India, Modi’s big state vote win positions him for second term. The market had been worried that maybe his popularity would have been diminished by the demonetisation that went on in India in the latter part of last year. But that seems not to be the case. In fact, he is more popular than ever. And this gives us some comfort that he might be able to push through more aggressively the rest of his reform program.
These are tangible developments, quite structural and long-term in nature compared to some of the shorter-term more speculative hopes that are underpinning the US market. Given that Asia still trades at a significant discount to the US and on a par with Europe, and on some measures cheaper than Europe, we think it is quite well-placed.
Globalisation and how that’s seen differently worldwide
One of the outcomes of the recent US presidential election, of the Brexit vote and the electoral tussles going on in France, Germany and the Netherlands, is this idea that globalisation as a world force is over, that it has seen its best days. And certainly in the West, there seems to be some political kickback against globalisation.
However, that is not the case in Asia. President Xi Jinping took up the rhetorical standard-bearer for globalisation and capitalistic growth across the world at Davos, which was seen as something of a turning point, at least where politics was concerned.
There are also fundamental economic reasons why Asia wants to keep developing its capitalist influence across the world growth and its influence across the world. This goes down to the fact that Asia’s workers have done well out of trade and global capitalism. This propels them towards taking a positive view of global capital expansion and globalisation.
Whereas from the West’s point of view diplomacy is carried out on a militaristic basis, China’s diplomacy is increasingly being carried out on an economic and trade basis, particularly as it pertains to the rest of the region and, in particular, Southeast Asia.
We have seen a lot of change in Asia, tangible, structural change, an embracing of capitalism and capitalistic growth, the desire to bring the rest of the region along with the growth that we are seeing in China, and all of this happening when markets are at valuations that are at a discount in much of the rest of the world.
The sentiment towards Asia probably reached its weakest in the beginnings of 2016 with concerns over Chinese debt and capital flight. It has certainly improved since then as the capital flight failed to happen and the debt problem failed to escalate into a financial crisis. But sentiment is far from exuberant. And still, the Asian markets, as they continue to rise, are still climbing a wall of worry, and people are not yet ready to embrace Asia as a core investment destination.
We remain confident. We still believe that the political reform that has taken place, the high savings, the desire for individuals to become more productive, to earn more money, and to be successful, will continue to drive rates of growth in Asia in excess of the rest of the world. And we still see Asia as a key place for core long-term investment. After all, it’s over half the world’s population.
Robert Horrocks is CIO at Matthews Asia