Asian markets set for continued growth in 2011, says JPMAM
Asian markets are set for continued growth in 2011, although this will be at a slower rate than 2010, reveals Geoff Lewis, Head of Investment Services in Hong Kong for J.P. Morgan Asset Management in his latest review of the market and outlook for next year.
Market Review
"After a stellar start to the month, Asian stock markets faded in November. The surge in the US long bond yield was one of the reasons behind the major market movements, including the weakness of commodities/equities, a strong USD, weak JPY and the outperformance of TOPIX. Another culprit was, and still is, inflation, primarily in China but also region-wide. Central banks have been responding, to the detriment of equities, by using administrative and monetary measures, which are also partially in response to the US Fed's QE2 program.
"Regrettably, these measures will take time to have any effect because the inflation pressure is being stoked by food prices and wages. This headwind could hurt Asian stock markets for the next few quarters. The Koreans' cross border firings also increased the geopolitical risk of the region. In addition, the global appetite for Asian equities was undermined by the Ireland banking and sovereign debt crisis, which many investors perceive as the undercard for the main event in Spain and Portugal.
"In India, a muted overall results season gave way to a wave of corruption scandals that rocked the corporate sector and the market. Business models as well as management credibility will be questioned, resulting in a further expansion of the quality premium demanded by some stocks over others.
"Indonesia's JCI lost 2.9% MOM in November, as MSCI rebalancing resulted in the underperformance of a few large caps in favor of new introductions while Hong Kong equities were weighed down by property measures announced during the middle of the month, which took the market by surprise in terms of severity. Thailand's SET hit a 14-year high before consolidating, resulting in a 2.1% MOM increase. The Bank of Thailand surprised the market with another 25bps hike in the repurchase rate, signaling its concern about inflation.
"And in Japan, the TOPIX rose 6.2% in local terms in November, driven by a strong set of first half results and a weaker yen. Japanese companies have shown good operating performance in a difficult environment and should benefit from any further weakness in the currency.
Outlook
"Asia itself continues to excel. Earnings growth in 2010 will be north of 35% and expectations for 2011 are between 10% to 15%. Interactions with corporate management reveal strong order books, stable margins, healthy balance sheets and generally positive outlooks. Valuations are reasonable.
"However, ongoing crises in North Korea and Europe, inflation fighting in China, and the resultant strong USD do not bode well for an immediate regional stock market recovery. Nevertheless, rising global inflationary expectations have historically been associated with strong commodity prices and Asian equity markets. While some near term volatility is possible, the outlook remains reasonably positive for Asian equities. In India, with large FII inflows this year and active participation by ETFs, we would not be surprised to see indiscriminate selling in the market. In fact, we would view this as an opportunity to add to certain stocks.
"For Thailand, earnings revisions momentum in the market remains one of the best in Asia. We remain positive towards cyclicals and see stock picking opportunities in mid-small cap plays that have corrected recently. In China, the Communist Party Political Bureau's meeting in early December decided to maintain an active fiscal policy but slightly adjusted monetary policy from "moderately loose" to "prudent." We expect this to be positive for sustainable, long-term growth. However, in the short term, the market will continue to focus on China's inflation trends.
"We have also seen a very strong correlation between the USD/JPY exchange rate and the 10-year US Treasury yield. As the US yield continues to surge, fund flows may move away from JPY to USD, resulting in further weakness of the yen. This would be positive for Japanese exporters. Although Japanese equities rebounded strongly in November, valuations still appear to be attractive especially among the best-in-class manufacturers. Our strategy is to remain overweight those companies which have exposure to growth markets, mainly in Asia, especially where they have an edge over local competitors."