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Undervalued Asian markets ripen as China fears abate

By David Osfield, manager of the EdenTree Amity International Fund
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Key economic indicators suggest the risk of a significant Chinese slowdown has largely abated. This is a positive for Asia more broadly, as the wider Asian economy tends to track the performance of its largest economy. 

Asia continues to display enticing valuation opportunities. Trading on a 2018 forecasted price-to-earnings (P/E) multiple of 13.1 the Asian market is also expected to deliver above a 3 per cent yield, according to consensus dividend analysis. The locally favoured price-to-book (P/B) value multiple for 2018 is also attractive at 1.5x, assuming 10 per cent earnings growth.

Collectively, these multiples suggest Asia not only offers attractive absolute value, but presents an even more compelling investment case relative to the MSCI World, which is trading on a 2018 forecasted P/E multiple of 15 and is over 2x P/B.

On this basis of these metrics, there is a persuasive argument for retaining a strong overweight allocation to the region.

Fears of China’s demise greatly exaggerated

The outlook for the Chinese economy typically dominates the outlook for Asian equities. This is for good reason: it is the largest economy in the region – the second largest globally.

Historically, the plights of the nine other economies that make up the “Asian 10” have often closely mirrored that of China, save perhaps, India.

The outlook for the Chinese economy has improved noticeably over the past 18 months. Fears of a hard landing and significant devaluation have receded and there is greater investor faith that its economy has stabilised, with nominal GDP growth steadily picking up over the last year.

Leading indicators suggest the worst is indeed behind China. The Asian powerhouse’s GDP grew at an annual pace of 6.9 per cent in the first quarter of 2017, a notch higher than analysts’ consensus expectations.

Leading indicators accelerating from lows

Headline Purchasing Managers’ Indexes (PMIs) in China look to have bottomed in early 2016 and, following a period of consolidation, have started to accelerate again, consistent with the rebound in other global PMI indices.

The Li Keqiang index shows a similar trend, with this index recently hitting a three-year high in February 2017 of 12.8, well above the 1.16 level of September 2015, which coincided with the hard-landing fears and the resultant sharp 40 per cent fall in the CSI 300.

Moreover, China’s indebtedness remains at the non-financial corporate level, with consumers soundly financed. According to Bank of International Settlements data, two-thirds of debt is at the corporate level. Moreover, given low household debt, consumers can aid a debt transition by spending rather than saving. Gross saving levels in China remain number one globally, despite falling from a peak of $51 per $100 of GDP in 2008 to $48 today.

Taiwan: engine of innovation

A key market in the Asian region benefiting from China’s resurgence is Taiwan. Taiwan continues to be a beneficiary of multi-period thematic trends in automation, electric vehicles and broad technological innovation.

It currently trades on a forecasted 2018 P/E multiple of 13.7, a 3 per cent premium to its 10-year historic average, assuming 6 per cent earnings growth (consensus) and an attractive 4.1 per cent dividend yield due to Taiwanese company management having a greater propensity to pay out dividends.

Taiwanese corporate governance and business practice are also relatively strong. It has benefitted from long-term working relationships, as the destination of choice for many European and US companies looking for an innovative and efficient manufacturing partner.





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