Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, David Osfield, co-fund manager of the EdenTree Amity International Fund, discusses how he is playing undervalued Asian markets as China re-awakens.
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% in the first quarter of 2017, a notch higher than analysts’ consensus expectations.
Leading Indicators Improve
Headline Purchasing Managers’ Indexes (PMIs) in China look to have bottomed out 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 fears of a hard landing and the resultant sharp 40% fall in the CSI 300 index.
Moreover, China’s indebtedness remains at the corporate level, excluding financial firms, with consumers soundly financed. According to BIS data, two-thirds of debt is at the company 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% premium to its 10-year historic average, assuming 6% earnings growth and an attractive 4.1% 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.
Asia continues to display enticing valuation opportunities.
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