Emerging Markets

Wealth Managers Aren't Running From Equities After Selloff

Tom Burroughes Group Editor 27 February 2018

Wealth Managers Aren't Running From Equities After Selloff

The sharp falls in global markets a few weeks ago might have suggested the inflection point for stocks has been reached. In Asia and emerging markets, managers seem to take a different view.

A few weeks ago it appeared that stock markets had hit a brick wall and the decade-long bull market in equities was being consigned to the ash-heap of history. However, it may last a while longer yet, at least in Asia, so wealth managers says. 

That markets have had a snap-back is not in doubt: Total returns on the MSCI World Index of developed countries’ shares (adding reinvested dividends to capital growth) are just about in positive territory since the start of January: 1.98 per cent (figures in dollars). For the MSCI Emerging Market index, the result is, however, rather more solid, at 5.16 per cent.

There appears to be a view that the sharp falls in equities earlier in February, triggered by concerns about faster-than-expected tightening in monetary responsibility, haven’t been followed by further large declines, although volatility is more evident than in late 2017. (The VIX index, a measure of implied volatility in US equities, is at around 16, having spiked to above 37 on 5 February.) 

And in China, the MSCI All China Index has chalked up total returns since the start of the year of 4.1 per cent; the MSCI China 50 is almost 9 per cent. In China, at any rate, markets are still positive.
Some of the correction in prices from their January levels is arguably welcome, Michael Chan, of fund management group El Sturdza, said in a note. “The correction is long overdue as we have had 13 straight up months since early 2017,” he said. The MSCI China Index has a price/earnings ratio of 12 times 2018 earnings, which is reasonable compared with regional or oversees peer markets, he said.

“Structural reform in China is paying off as evidenced from reviving profit growth in selective industries that go through supply side reform. Simply put, market leaders are the major beneficiaries of supply side reform as the weaker players are being forced out of the market due to failure to meet government requirements,” Chan said. “We are buyer of this correction and remain fully invested,” Chan continued. 

Other wealth managers argued that higher interest rates, as and when they come, will not be a serious problem for equities.

“Asia is in a good position to ride out interest-rates hikes from the Federal Reserve, given the prospects of a weaker dollar and a solid outlook for Asian exports. In three of the last four Fed tightening cycles, the dollar has weakened, a pattern that bodes well for a basket of Asian currencies that’s already rising against the greenback this year,” Christy Tan, head of markets strategy/research for Asia at NAB, said. 

“While that [weaker dollar] would ordinarily reduce the competitiveness of export-reliant economies in Asia, strong global growth is keeping demand buoyant. For Asian central banks, that means less pressure on them to move in lockstep with the Fed. An ongoing search for yield and a healthy macro-economic outlook puts policy makers in a `sweet spot’, and while they can hike inte0072est rates if they need to, there are no signs of overheating that require more urgency for now,” Tan continued. “Investors should also keep an eye on the `twin deficit’ in the US, with government spending projected to increasingly dwarf revenues and imports continuing to vastly outpace exports. Markets could all too easily understate the weakness in the US dollar going forward,” Tan added. 

Jason Yu, head of multi-asset product, North Asia, Schroders, sounded an optimistic note. “Since the improvement in corporate profitability last year, return on equity (ROE) rebounded from a trough. We are seeing a continuous meaningful recovery, which brings a positive earnings growth. We forecast the global GDP to achieve a growth rate of 3.3 per cent in 2018, a slight uplift from 3.2 per cent in 2017. We are expecting 4.9 per cent of growth in the emerging market space,” Yu said.

“Assuming an on-going healthy growth picture from a global standpoint, the return on equity in emerging markets will continue to drive up. We see the potential for EMs to continue to outperform developed markets,” he continued. 

Yu said Schroders forecasts Chinese GDP growth to come in at 6.4 per cent this year compared to 6.8 per cent in 2017. Schroders, he said, also expects recovery in Russia and Brazil, and expects growth in India to be supported by a recapitalisation of its banks. 

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