Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 102

Asia: bull or bear in the Year of the Goat

Since 1973, the Year of the Goat has generated the highest average returns among the 12 Chinese zodiac symbols, averaging an impressive 45.3% each year, according to JP Morgan.  Leaving superstition aside, there are some strong fundamental reasons why equity markets in Asia can make like a bull in the Year of the Goat, 2015.

The growth premium appears to be re-gaining ground

Asia’s reputation as a high growth region came under pressure during the last few years as the growth premium narrowed. This is a key reason why the region has de-rated since 2010. However, it appears as though the growth premium has bottomed out and is now beginning to regain some ground. As global growth also improves, the high beta nature of Asian economies begins to work in their favour, not against them. This higher return potential suggests Asian equities are increasingly relevant in an investor’s asset allocation even when considering the higher risk nature of the region.

The slowdown in China shouldn’t be seen as a ‘negative’

While China is experiencing a slowdown in growth, this in itself is not a negative for equity markets. The Chinese equity market tends to get excited when real Gross Domestic Product (GDP) growth is above ‘potential growth’ and sells off when real GDP slows below potential growth.

But 2015 could mark the year in which Chinese growth rebases after stimulus-led excesses and real GDP growth are expected to remain in line with potential growth. At the very least, this should not provide another reason for a de-rating. As risk sentiment normalises and volatility subsides, risk aversion should be a buying opportunity when coupled with attractive valuations.

Earnings expectations have improved

Earnings expectations for Asia excluding Japan in 2015 are the most realistic they have been in years. Consensus is forecasting earnings per share growth of 9.5%, which is below the usual starting point of around 15% and the five-year compound annual growth rate of 11.4%. This provides some comfort that the downside risk to earnings estimates is relatively low.

We believe the earnings upside will come from margin expansion. Asian net margins are at their lowest level since the financial crisis but appear to be bottoming out. Margin expansion in the coming period is expected to be driven by a combination of lower commodity prices, lower interest expenses, less wage pressure and faster revenue growth.

This year, the opportunities for creating alpha appear the best since the global financial crisis. The correlation among stocks in Asia has declined to five-year lows. This is true whether analysing the correlation between the largest ten stocks in the regional index, the largest stocks in each country or the largest stocks in each sector.

Asia is going through a process of reform, with many governments taking the window of opportunity to reduce subsidies, make State Owned Enterprises more efficient, improve tax systems, introduce foreign direct investment and private capital and enforce environmental standards. These reforms are critical to overcoming some structural weaknesses that have been brought to light by the cyclical slowdown. Most reforms are market friendly and should help drive a market re-rating.

Risks

Two recent events that were cause for concern – the quantitative easing decision by the European Central Bank and the Greek Election/Exit – barely registered. There is risk around when the US will raise interest rates. Our view is it may be delayed into late 2015 or even 2016 due to deflation and a lack of wage growth. With liquidity conditions from Europe, Japan and China remaining supportive, this is not the greatest risk to Asia.

The greatest risk is a Japanese-inspired currency war due to the Bank of Japan Governor Kuroda’s steadfast refusal to budge from the 2% core inflation target. This is because the Japanese definition of core includes the price of oil. If the target is not revised lower or to a core ex-oil target, another round of quantitative easing will no doubt be needed. The resultant yen weakness could force competitive devaluations by other Asian countries, with Korea one of the biggest casualties.

The Chinese property market and debt build-up remain an ever-present risk. This has spawned a greater and more immediate risk of capital flight. In the fourth quarter of 2014 alone, the capital outflow amounted to Rmb600 million by some estimates. Luckily, this liquidity reduction was exactly offset by the Reserve Requirement Ratio (RRR) cut. China has more fire power to do so with RRRs at 17.5-19.5%. Even if the ‘hot money‘ outflows are stemmed, there is a structural trend for more outward foreign direct investment. A prime example of this is the formerly unheard of Anbang Insurance’s US$2 billion purchase of New York’s Waldorf Astoria. This occurred after insurance companies were mandated to invest up to 15% of their capital offshore.

Portfolio positioning

We are overweight Asian equities from a dynamic asset allocation perspective. Within the region, our portfolios’ positioning is overweight China, Indonesia, India and the Philippines. However, stock selection remains paramount in light of the alpha opportunities and the concurrent risk.

Notwithstanding the risk of war – currency, physical or in cyberspace – Asian equity fundamentals look attractive. Valuations are supportive with realistic earnings estimates. Earnings upside comes from margin expansion on the back of falling commodity prices, lower wage pressure, faster revenue growth and lower interest rate cuts. The latter will also help drive a re-rating as the cost of equity falls as will an improvement in return on equity. All in all, we support the case for being a bull in the Year of the Goat.

 

Casey McLean is a Portfolio Manager and Analyst with AMP Capital Asian Equities. This article provides general information and does not address the personal circumstances of any individual.

 

  •   27 March 2015
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Which country will be the next China?

China’s new model is a plan for a hostile world

The prospects for investors in India

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.