Stimulus trumps trade

Chinese stimulus is starting to take hold, which will provide a boost to the region. We expect solid growth in India and above-trend growth for the Japanese economy. Equities are fairly valued, and we have confidence that 2019 earnings will meet market expectations. While we were never of the view that trade tensions would significantly derail growth, it is encouraging nonetheless that the risks are reducing.

The Asia-Pacific region is set to benefit from Chinese policy stimulus. We think emerging Asian equities should deliver around 10% earnings growth for 2019. Japanese economic activity has been disappointing, but we think the big downgrade to industry consensus earnings expectations is too pessimistic. Looking at risks, we are closely watching the Indian election in April and the raising of the value-added tax (VAT) rate in Japan that’s scheduled for October.

Let’s begin with China, where we are becoming more constructive on the economy. In our 2019 outlook, we said the economy should be able to deliver GDP growth of 6%. Recently announced stimulus measures (including the cutting of the VAT rate) provide upside support to this forecast.

We expect to see significant equity flows into the region following global index provider MSCI’s decision to increase the weighting of mainland China shares in its global benchmarks. This change could see up to $70 billion of net buying to mainland Chinese shares over the year. There will also be money flowing into Chinese bonds, as Chinese government bonds are added to the Bloomberg Barclays Global Aggregate Index, which will occur over a 20-month period beginning in April.

Indian growth should remain solid, albeit slightly below the pace set in 2018. The upcoming election will be a watchpoint, with published opinion polls in India predicting incumbent Prime Minister Narendra Modi’s coalition will secure the highest number of seats, though short of a majority. Election uncertainty is likely to be a headwind to investment, which has been the most disappointing component of economic growth over the past year. The Reserve Bank of India has followed the global shift toward more accommodative policy.

The growth outlook for South Korea and Taiwan has slipped a bit, in our opinion, but should remain positive through 2019. Our expectation of stabilising Chinese growth will be supportive. The South Korean economy will also likely benefit from a more accommodative central bank — though, we don’t expect further funds rate hikes by the Bank of Korea this year — and an increase in government social spending.

Japanese economic data has been disappointing, with the economy having contracted twice in the last four quarters. We maintain a constructive outlook and expect slightly above-trend growth (though, trend growth is very low in Japan, given demographic dynamics such as a declining population). While inflation remains tepid, there are anecdotal signs of it rising, particularly in food and services (due to the extremely tight labour market). The big hurdle for the Japanese economy this year is going to be the increase of the VAT rate scheduled for October. The disappointing data, weak inflation pulse and VAT increase should keep the Bank of Japan on hold through the rest of the year.

The outlook for Australia has deteriorated over the past couple of months as the downturn in the housing market has weighed on economic activity. The Reserve Bank of Australia (RBA) has wanted to see prices fall from very elevated levels, so we are unsurprised to see the RBA remaining calm. The market is pricing one rate cut by the end of the year. A rate cut seems unlikely, in our view, given the strength of the labour market.

The battle between the tailwinds of potential fiscal stimulus and accommodative monetary policy and the headwinds of slowing population growth and a slowing housing market continues to play out in New Zealand. As with the RBA, we do not expect the Reserve Bank of New Zealand to hike rates this year. Foreign demand, particularly in the region, will remain positive.

Risks around the trade war, in our opinion, have eased. Regional politics still pose some risk, along with the increase in the consumption tax rate in Japan.

Investment strategy

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

  • Business cycle: We are becoming more constructive on the region, underpinned by increasing signs of Chinese stimulus.

  • Valuation: Despite the strong start to the year, we are not seeing many signs of stretched valuations. Chinese mainland shares stand out as attractively valued, while Japanese valuations are close to fair. We see New Zealand equities as less attractively valued than Australian equities.

  • Sentiment: Investment flows into the region are going to be boosted by extra weight that MSCI is giving to Chinese A-shares equities. Anecdotally, it also appears that more investors are becoming interested in developing Asia.1

  • Conclusion: Within the region, we maintain a preference for emerging Asia over developed, underpinned by solid underlying growth and the benefits of Chinese stimulus.

1Developing Asia includes all of the countries in the continent of Asia except for the Middle East, and excluding the advanced economies in Asia, which are classified as Japan, Singapore, Hong Kong, South Korea and Taiwan.


Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

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