In the aftermath of the US elections, policy uncertainties have raised the risks to Emerging Markets (EM) assets, including trade frictions and a stronger USD, especially given Trump’s rhetoric around protectionism and anti-globalization.
However, a policy mix favorable for global growth should not derail momentum, as higher US interest rates combined with stronger GDP growth has historically been a favorable environment for EM and Asia, especially equities (see Chart 1). We remain of the view that the improving economic cycle in EM/Asia will remain the primary driver and we continue to focus on visible, improving fundamentals. EM and Asian equities continue to make a strong investment: their structural drivers remain strong and valuations are attractive from a long-term investment perspective with Asia ex Japan equities trading at 1.5x on a price-to-book (P/B) basis, below both their own historic average and developed market equities (see Chart 2). Also while ROEs are still depressed, they have stabilized at low levels, where we see some signs of improvement in productivity growth and increased competitiveness on the back of lower real wage growth as well as some currency adjustments.
The outlook for most Asian economies has improved due to a strengthening in external balances and slowdown in credit growth in most countries, with the notable exception of China.
Geoffrey Wong is Head of Global Emerging Markets and Asia Pacific Equities with overall responsibility for all Asian, Japanese and Australian equity teams, strategies and research. Geoffrey joined UBS in 1997. He also served on the board of directors of the Singapore Exchange, the combined stock and futures exchange of Singapore between 2003 and 2006.
New China offers opportunities
We believe the risks of a hard landing for China are slim in the next few years, even as the deceleration of China’s economy seems to have stabilized as it rebalances from an investment-led to a services-led economy. The quality of growth and cash flows should improve over time as China implements reforms to address issues such as problematic debt levels and overcapacity in state-owned enterprises. These significant changes in the economic structure are providing investment opportunities especially within the services sectors, such as e-commerce, social media, education and insurance.
India’s demonetization blunder could prove beneficial in the long-term
India’s nascent economic recovery seems to have been temporarily halted with the recent demonetization move. This is causing short-term disruption but in the longer term, it could benefit the country with greater transparency and improved tax collections. The formalization of the cash economy and tackling unaccounted income will also be important to a successful rollout of the GST bill, the benefits of which would accrue over the next several years in terms of improving productivity and boosting fiscal revenues. The current cash crunch is impacting consumer demand and will likely continue to do so for the nearterm. As evidenced by the demonetization drive, we believe that the Modi government will focus on removing bottlenecks and pushing through calibrated reforms to revive investments for sustained growth in the medium term. To drive stronger growth however, the country needs a sustained revival of its investment cycle.
Thailand remains fundamentally solid
South-East Asia has favorable secular domestic growth drivers and credit growth has moderated significantly in the region. Year-to-date, Thailand is the best performing market in Asia. While Thai assets have been under pressure lately following the King’s passing away and near term concerns about reduced consumption and infrastructure spending, we continue to view Thailand as a low risk economy with a large current account surplus, low public debt, low inflation and a strong banking system.
While Trump brings an increasing risk of rising global trade restrictions, we have yet to have more clarity about Trump’s policies or the extent to which they can be implemented. Meanwhile, the economic cycle is turning and we expect the fundamentals of this asset class to reassert themselves over time, and view Emerging Markets and Asian equities as an attractive long term proposition at current valuations. Our analysis shows large opportunities exist at the sector level including in consumers (as incomes increase), internet/e-commerce (which is helping to leapfrog traditional channels in EM) and financials (as economies recover and given low credit penetration).