Our Head of Asian Equities, Angelo Corbetta, was recently interviewed for his outlook on the Asian equity market in 2017. To view his video, click on the image below. Or read his transcript that follows.
What is the optimal way to access Asian equities – through a diversified approach or through a country specific approach?
Right now, we believe the best way is to invest in a pan-Asia approach, simply because you do not want to take too much specific risk given recent volatility in currencies and recent tensions in global yields. Another reason is that by investing with a pan-Asia approach, you can invest in Japan and Australia, which are two developed markets better positioned compared to the emerging markets in Asia. Japan and Australia are the only two markets where companies own foreign assets. Australian and Japanese companies invested many years ago in foreign assets in the US and in Europe. Therefore, they are not in a vulnerable position in terms of the weakening global trade.
What will be the drivers for Asian equities in 2017?
I think currency volatility will be very important and we will need to see what happens. Recent developments in the US, and what we can expect from the new US administration, may not be very positive for global trade and this might affect emerging markets in Asia, which historically have been highly geared to exports. Of course, if this materializes, currencies will be under pressure. Therefore, we need to watch local currencies. I think in the short term, we need a stabilization period and I don’t expect much to change in the next 3-6 months. Therefore, the most important factor to monitor is really the volatility of currencies and the tensions on the long part of the yield curve.
What are your most- and least-favored markets in Asia?
My favorite markets in Asia right now are Japan, Australia and Taiwan. My least favorite markets are Thailand, Indonesia, Malaysia and Korea. I like Japan, Australia and Taiwan because they have quality operations, they have been investing in R&D in a consistent way over the last 5-10 years, and more importantly, they own operating assets in foreign countries. This is really crucial because owning that type of asset in a foreign country means you are less likely to be hit by any trade friction.
A comment on China and India: India is still in a strong position in the medium- to long-term, but there was a big event recently, in which the government took some key steps to reduce the importance of cash settlement in the economy. The objective is to improve the tax revenues-to-GDP ratio, so it is a very important step that could work well in the long term. Unfortunately, in the short term, it will be a bit painful because the Indian economy relies heavily on cash – the portion of payments done by cash is very high. Therefore, in the short term there may be a negative impact on GDP. China is ok because it is quite an insulated market and it will not be easy for the US to label China as a currency manipulator. Technically, it is highly unlikely. What we expect to see are more reforms and vibrant domestic demand to support the local economy.
How can an allocation to Asian equities benefit an investor’s portfolio?
I think diversification is really crucial – we believe you need to consider diversifying your bets. On the equity side, we should not forget that Asia has become quite inexpensive historically in terms of price-to-book value and in terms of financial gearing, which has been coming down. So don’t underestimate possible surprises on the upside. You want to consider diversifying your portfolio, and you don’t want to take a very bearish call right now on a region which is not expensive.
 Diversification does not guarantee a profit or protect against a loss.