“[A] word of caution is warranted following the stellar performance of Chinese equities over the past year or so.
"Today A-shares trade at or above a 20x multiple and look simply expensive. A correction would offer a welcome breathing pause,” the fund house said in its asset allocation strategy note.
In the medium-term, the investment manager said it has an overweight view on the emerging markets in Asia compared to other EM regions.
“EM Asia macro fundamentals remain good and monetary policy supports are on the rise, particularly in China.
The fund house defines near term as three-to-six months and medium-term as one-to-two years.
Japan top pick
Japan remains one of the top picks for the fund house. It believes companies are showing improved profitability with the depreciation of the yen amid the government's massive stimulus programme.
“Companies have restored their margins and are now gaining market shares, supporting top-line growth. Following the example of GPIF [Government Pension Investment Fund], many institutional investors are lightening their JGB [Japanese government bonds] allocation toward more risky assets such as domestic equities and should continue to do so.”
US equities cut to underweight too
Apart from China, the investment manager has an underweight view on US equities as it predicts earnings disappointments in the near term.
“We have become increasingly concerned about the US market. Not only is it trading on the expensive side relative to its peers, EPS [earnings per share] are 15% above trend and profit margins are more likely to decrease owing to the strong dollar, monetary policy normalisation, and rising unit labour costs.
"Hence our call for earnings growth to be quasi flat over the coming quarters.”
European equities favored
According to the fund house, the European Central Bank’s quantitative easing programme will continue to be a positive for eurozone equities, which have become a favourite of investors.
“Ultra-low yields should continue to push investors out of bonds and into equities, generating substantial inflows into the domestic equity market.
“The ECB’s QE is playing a prominent role in improving market sentiment, thereby lowering the risk premium required by investors to hold equities.”
A weaker euro, lower levels of debt and low interest rates should continue to translate into higher margins for companies, the firm said.