2017: Year of the bull in Asian equities
When i first traded global equities in the early 1990s in New York, the Wall Street cliché de jour was that Asia is a growth warrant on the global economy. So it was no coincidence that most Asian stock markets rose 25-35 per cent (China was the outlier at up 45 per cent!) in 2017 amid the first synchronised global expansion since the post-Lehman recession of 2008-09. The macro ingredients for a major Asian rally were all in place. A Trump White House that embraced President Xi Jinping and did not launch a trade war with China after all the sound and fury of the election campaign.
Momentum in economic data and offshore flows EPS revisions. A slump in the US dollar and a trading range in the ten year US Treasury note yield. Asia ex Japan’s 22 per cent earnings growth. A spectacular technology and e-commerce revolution across China, India and Southeast Asia. Geopolitical positives – no war in North Korea, Politburo mandated easy money in China, the arrest/conviction of Samsung’s heir and a reformist government in South Korea, Shinzo Abe’s successful snap election a new king in Thailand, structural economic reforms in Indonesia, Vietnam and India.
Despite the fabulous performance of Asian equities in 2017, the bull market has been largely powered by earnings growth, not a valuation rerating. So I have a bias for sector’s and industries that will deliver the strongest earnings growth next year amid a benign macro zeitgeist. There are 25 industry groups in the MSCI Asia ex-Japan index and it will be critical to get the sector/ themes right next year. For instance, 2017 was the year I flagged China e-commerce (Alibaba up a stunning 75 per cent!), Taiwan’s Apple suppliers, India’s housing finance shares, Singapore banks and South Korea’s Republic of Samsung.
In Asian technology (software, Internet, chips), this is déjà vu 1999 in Silicon Valley. I should know, I spent 1999 shuttling between Palo Alto and my parents’ home in Jumeirah. Technology unquestionably is the sector leader in the Asian bull market that began in early 2016. Irrational exuberance. Yes. Apocalypse now? No. To butcher the Supertramp clas- sic, crisis, what crisis?
Of course, I had once major invest- ment disaster in 2017 (an existential constant in global markets crystal ball gazing business, as I knew only too well!) — Pakistan. The KSE100 index lost 25 per cent of its value once Supreme Court disqualified pro-business Prime Minister Nawaz Sharif, frontier funds began selling Pakistani blue chip, Habib Bank’s New York branch was ensnared in a money laundering scandal and Trump publicly castigated the military intelligence agencies in Islamabad’s Aabpara for hosting “terrorist havens”. Pakistan now trades at 8.6 times forward earnings, five per cent dividend yield and 1.4 times book value. If Imran Khan is not installed by the military as Prime Minister in 2018, Pakistan’s bull market will resume.
It is impossible to predict Asia’s destiny without reference to the Middle Kingdom and Bharat Mata. I was reading an Asian economic history tome which estimated that India was 27 per cent of global GDP in the year 1700, despite the Mughal Emperor Aurangzeb’s disastrous wars in the Deccan and invasions of Bijapur and Golkonda. In that same year, the Manchu, the Son of Heaven in China commanded an empire with no less than a third of global GDP. In contrast, Stuart/Georgian Britain was a mere two per cent, economic sad sack.
As the Chinese central bank’s $47 billion liquidity injection attests, monetary policy has turned stimulative again and earnings growth is accelerating to 18 per cent. China is no longer cheap at 16.8 times earnings and two times price/book value but I have no problem finding Chinese megacaps where the risk reward calculus suggests another 25-30 per cent upside. Readers of this column may remember my analysis of Alibaba’s New York ADR way back in 2016, when it was just above 100. Alibaba trades at 190 now.
The Indian government sprung a succession of macro surprises since late 2016. Modi’s rupee demonetisation bombshell, the GS and the Bankruptcy Code. The new rules on public sector bank non-performing loans. Forecasts for seven per cent GDP growth. Yet the most expensive stock market in Asia cannot coexist with negative earnings revisions. I cannot justify paying 18 times forward earnings for nine per cent EPS growth at a time when crude oil trades above $60 and the Fed rate hikes will begin to bite. This macro zeitgeist means Bhaluji’s stampede on Dalal Street ends with a bang, not a whimper, in 2018!