Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, Kim Lee, manager of the CF Canlife Asia Pacific Fund, gives top-down Asia market outlook, focusing on reforms.
Equity markets in Asia Pacific experienced a degree of volatility during the fourth quarter as a falling oil price and weaker global growth took their toll. Overall, the economic environment in the region continues to show improvement as sweeping reform programmes in China, Korea and India make an impact. In China, efforts to open the market and implement reforms has been a major driver and has laid a solid foundation for a major transformation of the economy as consumption and services begin to represent a larger share of gross domestic product.
Moreover, a move by the People’s Bank of China to cut interest rates, the first since 2012, helped to lift markets and could suggest the beginning of a cycle of credit easing.
Meanwhile, India appears to be heading towards a multi-year growth recovery as its business cycle begins to improve and the reforms introduced by Prime Minister Narendra Modi have a positive effect. Reforms in Korea are also expected to make a positive contribution to markets and the economy.
Ringing In the Changes
If there was something in the air in Asia Pacific throughout 2014, it was most certainly reform. A glance at the major economies implementing changes is somewhat remarkable. China, India, Korea and even Indonesia can all count themselves as being committed to change. Currently, there is much debate about whether or not China is experiencing a secular bull market. Over the past two years there has been a real effort to open China’s markets and implement real reforms that will benefit the economy and foster growth over the long term.
Driving this forward is a government that is unlikely to hit the brakes on reform plans any time soon as it grapples with a slowdown in economic growth and a transformation from an export-driven economy to one that is propelled by domestic consumption. While the government allowed China’s property market to experience a correction and then find its own balance, it has taken a more hands-on approach with financial reforms. On top of this, a move by the People’s Bank of China to cut interest rates, the first since 2012, helped to boost markets and could suggest the beginning of a cycle of credit easing.
Among the major changes to take place was a reform of state-owned enterprises, a crackdown on corruption and the linking of the Hong Kong and Shanghai stock exchanges in a move that should open up the market to foreign investors. More recently, the government’s reform programme has targeted its fiscal reporting system in an attempt to curb the large debts accrued by local governments. This means that governments at all levels will be required to produce fiscal reports through accrual accounting rather than cash management. Moreover, the government is encouraging local governments to raise funds through more transparent methods than in the past, with the potential that the somewhat opaque local government financing vehicles, or LGFVs, will be replaced by municipal bonds.
In India, Prime Minister Narendra Modi, who was elected into office May 2014, has ushered in the promise of unlimited reform measures that are aimed at boosting economic growth. The reforms that have been implemented so far have been small and measured rather than large and sweeping, but there is widespread belief that Modi will continue to push through further reform measures throughout 2015.
Korea’s own brand of reforms, dubbed Choinomics after the country’s Finance Minister Choi Kyoung-hwan, are aimed squarely at revitalising the economy. High levels of household debt and a weak property market have become problematic in Korea in recent years and the reforms under Choinomics have the aim of easing mortgage lending rules and boosting the property market, but it goes beyond that. The reforms also include structural changes in the form of penalty taxes on high corporate cash reserves, while offering tax breaks for companies that increase wages, investment and dividends. All of this is designed to encourage higher spending and greater investment.
Outlook and Positioning
While each country has experienced varying degrees of success, there can be no doubt that the situation looks bright in Asia Pacific. Major economic and market developments in the region are expected to yield positive results. China’s ongoing efforts to open up financial markets and implement fiscal reforms are genuine catalysts for change, laying a solid foundation for the transformation of the economy.
Meanwhile, India appears to be headed into a multi-year growth recovery as a business cycle begins to improve and reforms introduced by Prime Minister Narendra Modi have a positive effect. Similarly, reforms in Korea are also expected to make a positive contribution to markets and the economy.
With low oil prices, inflationary expectations are likely to be subdued in a low global economic growth environment. Asia is expected to be a major beneficiary of cheaper oil and the region as a whole could see increased interest from investors who are seeking growth. The region is trading at fair value of 12 times forward earnings with room for multiple expansion.
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