The prospect of a US rate hike and a stronger dollar could result in fund outflows from Asia in the near term, Young said, in an interview with Fund Selector Asia.
“While higher US interest rates will likely damage short-term sentiment and money will flow out of Asian emerging markets, the long-term investment rationale remains intact.”
A potential positive is that Asian exporters could benefit.
“The normalisation of the US Federal Reserve policy is based on the assumption of a sustainable US economic recovery. This is set to benefit Asian exporters and may help offset some of the effects of a slowdown in China.”
He added that Asian stocks still look cheap on both a relative and an absolute basis.
According to Young, Asian stocks looks cheap. The price of equities on average is 1.6 times the book value, which is lower than the long-term average of 1.8. Furthermore, Asian stocks are lower priced compared to developed market equities.
The fall in global crude oil prices also is helping some oil-importing countries like India and Indonesia reduce their domestic inflation and current account deficits.
Asian currencies-fundamentally sound
The current weakness in Asian currencies is related to the dollar’s strength, not because of fundamental problems in the countries, Young said.
“Asian economies are in better shape today because they [countries like India and Indonesia] started reducing current account deficits after the ‘taper tantrum’ back in 2013.”
India, Brazil, Indonesia, Turkey and South Africa -- dubbed the Fragile Five due to large current account deficits -- were the worst hit markets in 2013 after the US Federal Reserve announced plans to taper its stimulus programme. Foreign capital pulled out, market volatility spiked, and currencies plunged.
“With inflation under control, they now have room to cut [rates] again to support growth, an option that is closed to policymakers in most developed economies. Countries in [Asia] have also embarked on essential reforms.”
He gave the example of India and Indonesia, which have already cut costly fuel subsidies, while China has taken up a slew of monetary, economic and financial reforms.
“Asia’s long-term story still holds, buttressed by rising wealth, young population, and pent-up demand for housing, consumer durables, transport and banking services,” Young said.
India getting high
Following the sharp run-up in indices, Young agreed it is becoming harder to justify the valuation of Indian stocks at current levels unless there are signs of an improvement in corporate earnings.
But there are some attractive opportunities.
“India may struggle with a current account deficit, stifling bureaucracy and poor infrastructure, but some of its companies rank among the best in Asia in terms of return-on-equity and earnings growth.”
In his opinion, these include Infosys Technologies, Tata Consultancy Services and HDFC.
Even as China’s economy is slowing, Young said he sees long-term investment opportunities in consumption-driven sectors.
“While a slowing economy may be a cause for concern, it is also a reflection of a country undergoing wide-ranging reforms to achieve more balanced and sustainable growth.
“The authorities have deep pockets to manage the slowdown, deflate asset bubbles and avoid a so-called ‘hard landing’. Over the longer term, we think companies that can tap into growing domestic consumption are attractive.”
Companies such as travel agents, supermarkets and healthcare providers that tap into growing wealth and domestic consumption will be attractive to investors, he said.
China’s retail investors have been the driving force behind the A-share rally, according to Young.
“Speculation, rather than corporate earnings, has driven recent share price gains. Investment flows can easily reverse if further government stimulus fails to meet expectations.
“The latest corporate results point to slowing growth. As long as investor confidence can be sustained, then further gains are possible.
“On the other hand, the money that poured into the A-share market can just as easily reverse direction at the first major shock.”