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.

 


 

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

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

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.