Asian stocks fly high at the start of the new year

4 January 2018, written by Melanie Lee


Valuations in Asia are still attractive and the expanding corporate earnings growth will act as a catalyst in 2018. (Keystone)

Asian equity markets soared late this week, after the S&P 500 hit another fresh peak and minutes from last month’s US Federal Reserve meeting showed members resolved to only raise rates gradually.

Japanese shares also jumped to their highest in more than 27 years, according to the Financial Times, after the market opened following an extended New Year break.

UBS Chief Investment Office (CIO) believes that Asian stocks are primed for further catch up this year as earnings growth is poised to broaden, benefiting laggards in the market and select financials and consumer players.

Asia ex Japan corporate P/Es expanded by only mid-single digits this year thanks to earnings growth and currency tailwinds. CIO believes that earnings will be a key driver in 2018, possibly rising by 11 percent.

"While Asia posted a strong return in 2017, it was concentrated in the top 15 stocks, which drove over half of the performance. The good news is that growth will likely broaden, with speeds converging between markets like North Asia and ASEAN plus India, as well as between cyclical and defensive sectors,” said CIO analyst Sundeep Gantori.

CIO said valuations in Asia are still attractive and the expanding corporate earnings growth will act as a catalyst in 2018. CIO likes Asian companies that offer growth at a reasonable price, selective financials, and cash flow leaders.

"We expect AxJ markets to rerate moderately in 2018 as the region’s sustainable innovation-driven growth becomes more apparent," said Gantori.

CIO is overweight on China, Indonesia, and Thailand and underweight on Malaysia, Philippines, and Taiwan. CIO is neutral on Japan in its global tactical asset allocation.

"With earnings growth broadening in 2018, we expect markets to start paying attention to laggards. Any rotation should happen gradually, however, as we still see steady growth for 2017’s best performers - North Asia and IT," said Gantori.

Opportunities in ASEAN, such as Indonesia and Thailand, as well as in the financial and consumer sectors should be on investors’ radar.