Asian equities continue to push ahead
MSCI Asia ex-Japan has risen to over 655 in recent days, close to our end-June 2018 target of 660. The index has risen by 27.5% since the start of the year.
The current risk-on environment is supportive of Asian equities. The rally has also coincided with USD weakness and a range of economic data showing a synchronized global recovery.
“Asian equities are likely to continue to be helped by strong regional fundamentals, ongoing reforms, regional trade cooperation, and robust consumption.”
The region’s cyclical recovery, positive export growth, stable commodity prices and better corporate profitability from higher producer prices support earnings in the region.
Valuations remain relatively competitive. MSCI Asia ex-Japan currently has a 12-month forward price/earnings (P/E) ratio of 13.6, lower than that of S&P (18), and MSCI World (16.8).
We currently prefer Northeast Asia equities compared to Southeast Asia equities. China’s growth continues to look resilient. In addition, South Korea and Taiwan’s exports are supported by global external demand.
Japanese equities have been range-bound by contrast. At the time of writing, MSCI Japan has been hovering at around 960 levels. Favorable domestic factors have been alleviated by currency strength.
Continued central bank divergence should narrow the underperformance of Japanese equities. Yield differentials between the US and Japan have a positive correlation with the Japanese yen and negative correlation with Japanese equities. Hence, as future US rate hikes trigger a higher yield differential, this will likely support a weaker Japanese currency and a rally in Japanese equities.
Data as of Aug 2, 2017.
Source: CIO Bulletin, Aug 4, 2017