For Asian stock markets, expect the rest of 2021 to be brighter
- Although Asia has underperformed the US and Europe since the first quarter of this year, current valuations are supportive of Asia’s stock markets
- On the whole, Asia continues to be well placed to deal with the virus, maintain strong economic growth and have lower inflation than the US
Although a number of Asian countries, such as Vietnam and South Korea, have recently seen higher inflation rates, inflation remains low across the Asia-Pacific region. This means central banks can keep interest rates low for the foreseeable future, which in turn will support economic recovery and should be good news for equity investors.
Although Asia and the Pacific has underperformed the United States and Europe since the first quarter of this year, current valuations and the outlook are both supportive of the region’s stock markets.
Looking ahead to 2022, the US market is expected to run into some headwinds coming from monetary tightening as the US Federal Reserve begins to taper its bond buying and prepares for an interest rate hike.
So far, markets don’t expect rates to go up until 2023 but if US inflation rates remain elevated, there may be no choice but for hikes to be brought forward.
Higher inflation rates in the United States and other Western economies are largely a result of the supply distortions that have emerged since the post-lockdown economic recovery got under way in the third quarter of 2020.
Labour markets have been disrupted by lay-offs, furlough schemes and emergency income support. Manufacturing and transport have also been disrupted by Covid-19, resulting in shortages and bottlenecks across many industries. In the August release of the US Institute for Supply Management’s survey of manufacturing purchasing managers, data showed low inventory levels.
This might be bad news for supplying goods on time to stores and other businesses, but it bodes well for output and employment growth throughout the global supply chain. I expect global growth to remain strong as shelves are restocked and production ramped up.
Asian exporters, including Vietnam, South Korea and Taiwan, are well placed to benefit. The US is heading towards the end-of-year holiday season with notable shortages of consumer goods, particularly electronics.
Demand is strong as employment is quickly coming back, wages are rising and households are benefiting from the very strong positive wealth effects of the last two years (rising house prices and equity valuations). Exports to the US from Asia have been growing strongly.
For example, in the year to end-June, the US imported 22.6 per cent more from the Asia-Pacific region than a year earlier. The comparison is easy of course – June 2020 was depressed – but the recovery has been impressive none the less. By value, US imports from South Korea and Taiwan are at an all-time high.
Semiconductors, finished consumer electronics and motor vehicles are all products suffering supply disruptions. In time the bottlenecks will ease but there is little reason to be pessimistic about demand. Global consumer and capital spending remain strong and Asian producers will be important in meeting that demand.
The latest consensus equity earnings forecasts make for attractive reading. For the MSCI Asia-Pacific universe, the next 12 months are forecast to see earnings per share rise by 20 per cent – matching the forecast for the S&P 500. Yet Asian markets are more attractive from a valuation point of view.
The same earnings forecast data translates into a 12-month forward price-to-earnings ratio of just 15 times for the region, compared to over 20 times for the US market and even higher for the technology-heavy parts of the US market.
Of course, Covid-19 remains a concern. Outbreaks of the delta variant in China and other countries in Asia have the potential to disrupt economic activity. However, this is also the case in the US, particularly in areas where vaccination rates are low.
On the whole, Asia continues to be well placed to deal with the virus and maintain strong economic growth rates. Inflation rates are less of a concern and in some countries even appear to have peaked already. Interest rates should remain very low across the region as a result.
What might be more of a concern for equity investors in Asia in the remainder of 2021 is evidence of a slower Chinese economy. Recent data points to some slowdown in credit creation, while it is not clear yet how recent policy announcements might impact the economy.
Poor weather may also have been a factor behind the slowing of output and retail sales in July. Investors will need to watch closely to see whether slower growth is temporary or not, but the global picture is likely to remain supportive with accommodative monetary policies in Europe and the US for the remainder of this year at least.
Strong global demand, restocking and the revival of travel and trade are good for the Asia-Pacific region. With inflation lower than in the US, there is little reason for monetary conditions to tighten. The potential for Asian stock markets to perform in the second semester of the year is clear to see.
Author: Chris Iggo, SCMP
Chris Iggo is the chief investment officer for core investments with AXA Investment Managers