Emerging Asia has faced pervasive headwinds in recent years, but we believe the region is at a turning point. BlackRock’s Richard Turnill explains with the help of this week’s chart.
Emerging Asia has faced pervasive headwinds in recent years, but we believe the region is at a turning point. We see a number of underappreciated tailwinds supporting the case to invest there. This week’s chart shows two of the tailwinds gathering momentum: a nominal growth rebound in China and improving corporate profits.
China’s nominal gross domestic product (GDP) rebound is reflected in producer prices turning positive year over year for the first time in nearly five years last month. See the chart above. We see this reflationary shift taking hold as growth in China stabilizes. This should support emerging market (EM) Asia, as business cycles and market returns there are increasingly correlated with those in China.
Reflation across EM Asia is reflected in improving corporate profits. The shift away from the steep earnings downgrades of years past is evident in the chart above. EM Asia currencies have also stabilized this year, and the region has relatively high credit ratings among EMs. Finally, strong macro fundamentals and demographics support the region’s improved economic outlook.
Investors are tiptoeing back into the region: Foreigners have bought a net $13 billion of regional bonds this year and appear to be returning to equities. They likely have room to up allocations: $71 billion has left Asia ex-Japan bonds and stocks since the mid-2013 “taper tantrum” set off by the Federal Reserve (Fed) signaling an end to bond purchases, according to EPFR Global data. We don’t expect a tantrum replay, as we see the Fed raising rates gradually. Plus, EM Asia appears in better shape now than in 2013. We do see policy-related risks to China’s growth such as new property curbs. EM Asia also faces the potential challenges of renewed U.S. dollar strength, U.S. protectionism post-election and geopolitical crises.
Overall, we see compelling reasons to invest selectively in EM Asia long term. We favor assets in Indonesia and India. Rate cuts in Indonesia support more corporate investment and consumer spending, while India has implemented key reforms to its tax system and bankruptcy code. Read more market insights in my Weekly Commentary.
This article is brought to you courtesy of BlackRock.