Asia-Pacific: Waiting on hopes and fears
Economic and market conditions in the Asia-Pacific region are less than dynamic as we move towards 2016.
In Japan, despite the “Three Arrows” of Abenomics – fiscal stimulus, monetary stimulus and structural reform – the evidence of economic recovery is patchy and unconvincing. GDP data has skirted (and barely avoided) recording a “technical recession.”
Meanwhile, in China, GDP growth has slipped from the 7% to 8% range to the 6% to 7% range. A number of Chinese indicators are very weak, notably trade and construction activity.
The Australian national income numbers are holding up, but with weak commodity prices, a softening housing sector and flat corporate profits, it’s hard to get too excited. Growth in New Zealand is acceptable, but modest.
Indeed, of the major regional economies, only India is delivering some upbeat results.
The chart below shows recent GDP trends in a selection of regional economies:
Asia-Pacific real GDP growth
Source: Thomson Reuters Datastream as of December, 3, 2015
Growth drivers for the year ahead
Whether market “hopes” for the recovering economies or “fears” for the vulnerable nations will gain the ascendancy in 2016 depends in large part on the growth outcomes in the U.S. and Europe. We are sufficiently positive about the global outlook to expect ongoing recovery in Japan; soft landings in China and Australia; and steady growth in India—and, at lower levels, in New Zealand.
Greater or lesser currency weakness across much of the region, and broadly stimulatory monetary policies, are common themes in our optimistic diagnosis for the year ahead. In Japan in particular, fiscal stimulus and a program of corporate reform should provide the economy with added support, as will lower energy prices.
In China, we are witnessing a convincing program of market reform—recently acknowledged by the International Monetary Fund with its inclusion of the renminbi in the international Special Drawing Rights (SDRs) currency basket. The transition from an economy driven by fixed investment to one driven by consumption and services also appears to be on track.
Further south, in Australia, both fiscal and monetary policy are somewhat gridlocked, and the downside risks following a record housing boom remain a watch-point. The current data as of Dec. 11, 2015, remains mixed rather than negative, however, and we do not expect recession in 2016.
Investment strategy: value, cycle, sentiment
Applying our investment strategy process of value, business cycle and sentiment we get the following:
Equity markets in the Asia-Pacific region offer reasonable value, in our assessment. We are broadly positive about the cycle outlook, but we are not looking for more than single-digit percentage returns in 2016. Sentiment is muted, though it offers some potential for upside.
Japan is our preferred equity market in the region, benefitting as it does from good corporate profit growth, a favourable policy backdrop, lower oil and gas prices, as well as a weaker yen.
China “A” shares had a roller-coaster ride in 2015, but we believe that the valuation excesses of mid-year have now been largely unwound. Tailwinds from the market-deregulation program, in conjunction with China’s good long-term growth prospects, provide this market with support. Only uncertainties regarding debt imbalances hold us back from a more overtly positive stance, for now.
In Australia, the equity market is still trading down at 2006 levels, and the dividend yield is up to an eye-catching 5%, based on the S&P/ASX 200 Index as of Dec. 11, 2015. Value is less compelling than it might at first appear, however. The thin price-to-earnings discount to global valuations leaves us cautious about this materials- and financials-heavy market, however, as do the lack of earnings momentum and the stretched payout ratios. Cyclical factors are acceptable, but no better than neutral. Sentiment is negative.
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2016 Annual Outlook