According to Geoff Lewis, Senior Strategist, Asia, Manulife Asset Management, below is the top-line market outlook for 2018:
- Accelerating, synchronized global growth is likely to continue in 2018, with further strong earnings growth.
- Amid all talk of central bank tightening, global policy rates are likely to stay historically low and monetary conditions continue to be accommodative.
- With the trend of a recovering oil price going into 2018, inflation and inflation expectations are likely to increase moderately.
- Despite expectation of slowing structural China GDP growth, growth rate of 6% plus should adequately support emerging markets and global risk assets.
“The global economy has the wind fully in its sails, drawing a sharp contrast to early 2016 when anxiety for a stall in the upswing was rife. Global measures of manufacturing and consumer confidence continue to be robust, with developed market manufacturing confidence rising to a 43-year high in September 2017, as well as a combined developed and emerging market confidence at its highest since April 2011,” commented Geoff Lewis.
Accelerating global economic growth typically correlates well with corporate earnings. Positive macro fundamentals allow for an environment for corporates’ operational leverage, and are therefore conducive to a further rise in profits. Geoff said: “Better growth typically has a bigger impact on earnings when earnings are low. Sell-side EPS forecasts for emerging and developed markets have been upgraded across the board, although to a lesser extent for the US. Emerging markets are therefore poised to take further advantage of the global growth cycle.”
“Monetary conditions are likely to remain easy for quite a while to come, with global policy rates still looking remarkably low despite the much talked-up Federal Reserve and the European Central Bank’s tightening. Conditions may gradually become less accommodative as 2018 progresses, but even then, in our view, not to a level where they become restrictive,” added Geoff.
Geoff continued: “We think the price of crude oil is moving into a higher range, with some impact on headline CPI inflation expected in 1Q 2018. This may impact inflation expectations, creating nervousness in financial markets. But a move to US$ 60-per-barrel oil is unlikely to cause an inflation panic. Central banks are likely to ‘look through’ the first quarter data and will not alter their policy trajectory on account of oil."
“China after the 19th National Congress of the Communist Party is a factor for stability that is helping to underpin Asian assets. Coupled with the sustained, above-trend global growth forecast for 2018, China’s key export sector is well supported. China’s GDP growth, albeit slowing down somewhat, should continue to project confidence globally, especially for emerging markets. We believe the bull market in emerging economies is no flash in the pan but is here to stay, with foreign institutions generally underinvested in an asset class that is returning to favour after some years out in the cold.”
On risks facing investors in 2018, movement of US wages, rebound of US dollar, and macro risks around China’s policies are areas to look for.
Divergence likely a dominant theme for Asian equities in 2018
Convergence was a key theme in 2017, a year when gradual reflation in China was witnessed and a rising in Producer Price Index lifted prices, providing conditions for a cyclical upturn that improved earnings for industries across the board. For 2018, divergence across industries and within sectors will likely emerge.
Ronald Chan, Chief Investment Officer, Equities, Asia (ex-Japan), Manulife Asset Management, said: “Divergence can be expected in Asian markets, not least China. Pockets of opportunities may shift from ‘growth’ to ‘value’ sectors like banks, insurance, consumer discretionary and industrial firms. Some ‘growth’ companies will continue to perform well, such as the big, quality IT/internet names due to strong fundamentals, but the lower-tier names could show signs of moving sideways as valuation may look over-extended.”
Ronald continued: “We expect Asian equities to continue do well in 2018, especially relative to developed market equities. Although potential gains may not be as extravagant as that of 2017 given the high base, Asia is still in the mid-cycle of a cyclical rally and is in a solid footing as supported by structural reforms across various countries. Asia uniquely offers a structural economic growth story, as evident in China, Korea and Indonesia.”
“In China, we are seeing some positive structural reforms in the financial sector with the aim of deleveraging and increasing financial transparency, as well as further opening for foreign investments. These trends will continue in 2018 and, as a result, large banks and insurance companies may benefit as they should see increasing demand for traditional wealth products and reduction in cost of funding,” commented Ronald.
There are also reasons to be constructive on Indonesia and South Korea. Ronald added: “Bank Indonesia has room to cut interest rates to stimulate the economy further even though exports remain robust. Private consumption is also expected to recover for cyclically lower levels. The earnings picture, especially for the construction, consumer, financial, and infrastructure space, looks healthy. As for South Korea, with the pledge of reforming family-run conglomerates by the current president, we have seen some of the country’s largest conglomerates spinning off non-core assets in an attempt to realize the true value of the underlying operation, while creating opportunities for the smaller competitors to enter into the industry.”
Asia bonds: Global growth and reforms to drive performance
As fundamentals concerning Asia such as improving global growth, benign inflation, ample liquidity, as well as unresolved geopolitical risks are expected to remain for 2018, opportunities in the Asian fixed income space will emerge from continued growth and supportive economic and reform policies.
Endre Pedersen, Chief Investment Officer, Fixed Income, Asia (ex-Japan), Manulife Asset Management, said: “Continued growth in Asia and its stable inflation create a supportive environment for Asian bonds in 2018. Government policies and reforms such as China’s deleveraging process and India’s bank recapitalization bode well for Asian bond fundamentals.”
Endre continued: “Deleveraging will continue as the prevailing theme of China’s fixed income market in 2018. A focus on qualitative rather than quantitative growth, reform of state-owned enterprises (SOEs), and continued stability of the financial system are factors reinforcing a favourable environment for investing in SOE debt.”
The robust demand for China’s sovereign bond issue in October, which allowed Beijing to price the offer at a competitive rate, underpinned the increasing attractiveness of China debts. It also augurs that SOEs will pay a lower rate on debt offerings moving forward.
Value can also be found in the Asian high-yield space. Endre added: “High-yield issuance has increased notably in 2017 and the market has evolved accordingly. The composition of issuers may change particularly with Indonesia’s upgrade to investment grade in May. This could result in potential new issuance by Indonesian corporates on the back of tighter spreads after the credit rating decision. In our view, high-yield offerings in the Pan-Asian market will continue to appeal, particularly when coupled with shorter duration profiles in a rising interest rate environment.”
Endre also offered views and implications on interest rate and currencies. He added: “In interest rate, we continue to favour the higher-yielding bond markets of India and Indonesia that offer attractive coupon yield. In currency, we expect US rate normalization to proceed at a faster pace than current market expectations that should see Treasury yields gradually move higher.”
Asian investors’ sentiments remain positive
Asian investors’ sentiments towards the 2018 market reflect similar views on the overall economy and the respective asset classes. According to the latest Manulife Investor Sentiment Index (MISI), Asian investors’ sentiment for investing in equities in the next six months jumped to 38 points in 2017, representing a 19-point increase from 2016. Asian fixed income investment sentiment also reached 38 points, reflecting a 25-point surge from last year.
Geoff commented: “There are no surprises coming out of the MISI survey with a largely positive investment sentiment on the back of a good year in 2017. It is especially encouraging to see Asian investors showing sophistication in appreciating the fixed income asset class. The increase of fixed income investment sentiment shows healthy signs that investors are reserving a place for bonds, as portfolios should stay diversified generally. Security selection for both asset classes, however, continues to be very important as the 2018 market is not without risk.”
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