Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 102

Asia: bull or bear in the Year of the Goat

Since 1973, the Year of the Goat has generated the highest average returns among the 12 Chinese zodiac symbols, averaging an impressive 45.3% each year, according to JP Morgan.  Leaving superstition aside, there are some strong fundamental reasons why equity markets in Asia can make like a bull in the Year of the Goat, 2015.

The growth premium appears to be re-gaining ground

Asia’s reputation as a high growth region came under pressure during the last few years as the growth premium narrowed. This is a key reason why the region has de-rated since 2010. However, it appears as though the growth premium has bottomed out and is now beginning to regain some ground. As global growth also improves, the high beta nature of Asian economies begins to work in their favour, not against them. This higher return potential suggests Asian equities are increasingly relevant in an investor’s asset allocation even when considering the higher risk nature of the region.

The slowdown in China shouldn’t be seen as a ‘negative’

While China is experiencing a slowdown in growth, this in itself is not a negative for equity markets. The Chinese equity market tends to get excited when real Gross Domestic Product (GDP) growth is above ‘potential growth’ and sells off when real GDP slows below potential growth.

But 2015 could mark the year in which Chinese growth rebases after stimulus-led excesses and real GDP growth are expected to remain in line with potential growth. At the very least, this should not provide another reason for a de-rating. As risk sentiment normalises and volatility subsides, risk aversion should be a buying opportunity when coupled with attractive valuations.

Earnings expectations have improved

Earnings expectations for Asia excluding Japan in 2015 are the most realistic they have been in years. Consensus is forecasting earnings per share growth of 9.5%, which is below the usual starting point of around 15% and the five-year compound annual growth rate of 11.4%. This provides some comfort that the downside risk to earnings estimates is relatively low.

We believe the earnings upside will come from margin expansion. Asian net margins are at their lowest level since the financial crisis but appear to be bottoming out. Margin expansion in the coming period is expected to be driven by a combination of lower commodity prices, lower interest expenses, less wage pressure and faster revenue growth.

This year, the opportunities for creating alpha appear the best since the global financial crisis. The correlation among stocks in Asia has declined to five-year lows. This is true whether analysing the correlation between the largest ten stocks in the regional index, the largest stocks in each country or the largest stocks in each sector.

Asia is going through a process of reform, with many governments taking the window of opportunity to reduce subsidies, make State Owned Enterprises more efficient, improve tax systems, introduce foreign direct investment and private capital and enforce environmental standards. These reforms are critical to overcoming some structural weaknesses that have been brought to light by the cyclical slowdown. Most reforms are market friendly and should help drive a market re-rating.

Risks

Two recent events that were cause for concern – the quantitative easing decision by the European Central Bank and the Greek Election/Exit – barely registered. There is risk around when the US will raise interest rates. Our view is it may be delayed into late 2015 or even 2016 due to deflation and a lack of wage growth. With liquidity conditions from Europe, Japan and China remaining supportive, this is not the greatest risk to Asia.

The greatest risk is a Japanese-inspired currency war due to the Bank of Japan Governor Kuroda’s steadfast refusal to budge from the 2% core inflation target. This is because the Japanese definition of core includes the price of oil. If the target is not revised lower or to a core ex-oil target, another round of quantitative easing will no doubt be needed. The resultant yen weakness could force competitive devaluations by other Asian countries, with Korea one of the biggest casualties.

The Chinese property market and debt build-up remain an ever-present risk. This has spawned a greater and more immediate risk of capital flight. In the fourth quarter of 2014 alone, the capital outflow amounted to Rmb600 million by some estimates. Luckily, this liquidity reduction was exactly offset by the Reserve Requirement Ratio (RRR) cut. China has more fire power to do so with RRRs at 17.5-19.5%. Even if the ‘hot money‘ outflows are stemmed, there is a structural trend for more outward foreign direct investment. A prime example of this is the formerly unheard of Anbang Insurance’s US$2 billion purchase of New York’s Waldorf Astoria. This occurred after insurance companies were mandated to invest up to 15% of their capital offshore.

Portfolio positioning

We are overweight Asian equities from a dynamic asset allocation perspective. Within the region, our portfolios’ positioning is overweight China, Indonesia, India and the Philippines. However, stock selection remains paramount in light of the alpha opportunities and the concurrent risk.

Notwithstanding the risk of war – currency, physical or in cyberspace – Asian equity fundamentals look attractive. Valuations are supportive with realistic earnings estimates. Earnings upside comes from margin expansion on the back of falling commodity prices, lower wage pressure, faster revenue growth and lower interest rate cuts. The latter will also help drive a re-rating as the cost of equity falls as will an improvement in return on equity. All in all, we support the case for being a bull in the Year of the Goat.

 

Casey McLean is a Portfolio Manager and Analyst with AMP Capital Asian Equities. This article provides general information and does not address the personal circumstances of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

Which country will be the next China?

China’s new model is a plan for a hostile world

The prospects for investors in India

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.