2018 Outlook: what to expect from key Asian Equities (Part 1)

After a dismal performance seen in 2016, Asian ex Japan stock markets have chalked up a hefty gain of 40% in 2017, outperforming the S&P 500 by a wide margin.

After a dismal performance seen in 2016, Asian ex Japan stock markets have chalked up a hefty gain of 40% in 2017, outperforming the S&P 500 by a wide margin. 

*Returns from MSCI Asia Ex Japan & MSCI Emerging Markets are derived from ETFs (AAXJ & EEM) 

China has acted as an anchor of stability in Asia as the authorities have successfully prevented an economic “hard landing” scenario from deleveraging policies designed to suck some froth from speculative activities such as property development. We expect that China will continue to play a pivotal role in shaping the movement of Asian financial markets and others in 2018. 

  • China central planners will continue to tighten monetary policy gradually to contain the speculative froth in the property market and wealth management products in its shadow banking system. Higher interest rates will continue to stabilise the Yuan where it has strengthened by 7% since its Jan 2017 high of 6.98 printed in the offshore USD/CNH. This gradual deleveraging process will mitigate capital outflows. 
  • Execution of government policies is expected to be faster with President Xi overwhelmingly endorsed by Party Congress. Thus, fiscal expansionary policies related to urbanisation, scientific innovation (China Manufacturing 2025 initiative) and the Belt and Road Initiative (BRI) will be the main growth drivers in 2018, offsetting the negative effects associated with the deleveraging policies. 
  • Given a stable economic growth backdrop in China and a continuation of the gradual interest rate hikes by the U.S. Fed, risk assets are likely to continue to attract inflows. The Hong Kong stock market will benefit from a “China proxy” play via Chinese stocks listed in the Hong Kong due to capital controls in China. 
  • Hong Kong equities are still trading at a discount over developed markets where its 1-year forward PE ratio stands at 12.3 versus 18 for U.S. equities. Technical analysis also favour a bullish outlook on the Hang Seng Index (HSI) above its 23400 major support where a break above the all-time high of 31960 is likely to trigger a further potential up move to target the next resistance at 35000.

Chart is from eSignal

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