China’s economic growth is slowing, but Ayaz Ebrahim, Asia ex-Japan equities chief investment officer at Amundi, said he does not see any major issues in the economy.
Ebrahim stressed that even if the rate of growth is slowing, it is still expected to be comparatively strong in a global context at about 6.5-7%.”
“We believe that a lot of bad news in China has been priced-in [by the markets]. We think the reflationary policies of the Chinese government will help the equity market as well. China still has a lot of ammunition in terms of reflating the economy, if it wishes to do so.”
“Interest rates in Asia will remain benign and in places like China and India, there is a potential for further rate cuts,” said Ebrahim, who is also a deputy chief executive for Amundi in Hong Kong.
India seems on track
Ebrahim highlighted that India has some of the strongest economic growth in the region, supported by a recovery in corporate earnings.
“We are looking at an earnings growth of 16% over the next 12 months, [and see this] rising to about 18% next year.”
In terms of sectors, Amundi likes financial firms and consumer consumption plays.
“We believe with the economy reflating, the financial sector will benefit from that [and see] improving loan growth. Non-performing loans in some of the public sector units will also probably get better with the improving economy.”
Moreover, he said that the market is expecting the Reserve Bank of India to cut the interest rate by another 75-100 basis points over the next 12 months, which could provide a tailwind for corporate earnings.
China H-shares attractive
Kenrick Leung, who manages the Greater China equities portfolios for Amundi, said he finds H-shares attractively valued compared to the A-share market.
He explained that Chinese regulators have also recently permitted local mutual funds to invest in Hong Kong shares using the Shanghai-Hong Kong Stock Connect programme.
“The A-share market has run quite a long way. So, if you look at the valuations, while it is not still that expensive, it is still [about] 50% higher than it was a year ago,” said Leung, director of investment for Greater China equities.
The A-share market surged toward the end of last year, particularly after the November launch of the Stock Connect initiative.
Asian exporters gaining
Amundi said it is positive on Asian markets as long as global economic growth remains intact. Furthermore, Asian exporters are likely to benefit from an improvement in the US economy.
Other positive indicators are generally healthy balance sheets of companies across Asia along with some cheap stock valuations, which are supported by earnings growth.
“Our view on Asia is constructive,” Ebrahim said.
Depending upon country outlook, Amundi likes domestic consumption stories and is selectively overweight certain technology and ecommerce companies and component manufacturers.
Earnings growth for Asia ex-Japan this year he believes will be 11-12%. Earnings could be upgraded if US economic growth stimulates export growth.
“Although there have been concerns about the impact of the US rate rise on equity markets in general, our firm belief is that if the interest rate rise is gradual, we would view that as generally a positive for Asian earnings and therefore it will be good for equities as well.”
A stronger dollar could boost the export competitiveness of countries like Taiwan, Ebrahim said.
“Taiwan does benefit a fair bit, because there is no direct competition with Japan as a number of Taiwanese companies are component manufacturers in the Japanese manufacturing chain. So they will be big beneficiaries from a stronger US economy.”
However, Korean manufacturers are in more direct competition with their Japanese counterparts, and a weaker yen could create headwinds for some Korean exporters.