Rising above the trade war

The region should see another year of GDP growth in the 4.5-5.0% range, and we expect China and India will be the major contributors. Equity markets in the region are good value as 2018 ends, and we confidently predict that earnings growth will meet market expectations in 2019. A key risk for the region is trade tensions. However, we do not believe this will derail the growth outlook.


Looking toward to another solid year for the Asia-Pacific region, we expect emerging Asia to deliver more than 10% earnings growth, while Japan is well-placed to exceed modest industry consensus expectations. Politics will be a key theme for the region, with elections to be held in India, Indonesia, the Philippines and Australia. The outcome of trade negotiations between the U.S. and China remains the key risk.

We think China will be able to deliver GDP growth of 6%. The economy faces headwinds of high indebtedness, slowing property construction, poor demographics and a confrontational U.S. stance on trade. However, we think the stimulus from the Chinese government and work surrounding its infrastructure-focused Belt and Road Initiative will mitigate these concerns.

Indian economic growth is expected to remain around a very healthy 7.5% in 2019, driven by household consumption and some solid capital expenditure. The general election is set for March 2019, and opinion polls held in late 2018 by Indian agencies indicate it is going to be a close race. This could incentivise some pre-election spending promises, and some corresponding upside surprise. On monetary policy, we expect the Reserve Bank of India to keep rates on hold.

The South Korean economy should maintain a decent growth rate of 2-3%, with some fiscal stimulus in the form of higher social spending likely. With GDP growth running close to potential, and inflation close to the target, we are likely to see the Bank of Korea raise rates at least once through 2019.

Australian growth is likely to slow, albeit still above trend. The key focus for 2019 is going to be the housing market, given elevated prices are starting to slip, household indebtedness is high, and the tax regime for housing is likely to tighten. While this is a risk for the economy, there is a large pipeline of infrastructure work in place, the labour market is expected to remain strong, and support is expected to come from commodity prices. With inflation and wages gradually rising, and the labour market at full employment, we think the Reserve Bank of Australia will have the scope to raise rates once in 2019.

The New Zealand economy continues to face the challenges of falling population growth, a slowing housing market and depressed business confidence, which is being driven by uncertainty around future government policy. We don’t expect the Reserve Bank of New Zealand to make any monetary policy changes in 2019, while we will be closely watching the 2019 federal budget for signs of less fiscal spending from the Labour Party-led government.

Japanese growth should see a boost from reconstruction efforts following a year of natural disasters in 2018, along with construction work ramping up for the 2020 Olympics. The extremely tight labour market should provide a boost to consumption (as wages start to rise), as well as capital expenditure (as firms try to improve labour productivity). Our key watchpoint will be the consumption tax hike that is scheduled for October 2019, which has the potential to elicit some front-loading in the lead-up, followed by a fall-off. We expect Japanese bond yields will gradually edge up from a very low base, as inflation continues to slowly move higher.

An escalation of the trade war remains a key risk to the region, as a slowdown in China would have large knock-on effects given the interconnectedness of Asian trade. Our central case is that this would slow, but not derail, regional growth.

Investment strategy

For regional equities, we assess business cycle, value and sentiment considerations as follows:

  • Business cycle: The fundamentals of the region remain intact, with Chinese growth still decent despite a slight slowdown.
  • Valuation: Across the region, valuations are fair to attractive. Japanese and Chinese equities stand out as attractive, while Australian equities are close to fair.
  • Sentiment: Our view is that the recent volatility surrounding trade headlines and Wall Street weakness will fade and allow the market to focus on the opportunities and value that are present in Asia-Pacific.
  • Conclusion: Our outlook on the region for 2019 remains cautious, but positive, given decent economic fundamentals and good value. Risks around a trade war remain a headwind.

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