Asia has been a difficult place to invest in during the past few years.
Economies had generally been slowing, while companies – after the strong recovery in share prices post the global financial crisis – had been a bit slow in focusing on generating returns.
It is a different story now, however. At an aggregate level, there are attractive valuations across the region compared with developed markets, although certain markets and industries are at more elevated levels than others.
Meanwhile, earnings growth remains positive, and with the exception of China, the region’s economies are also on a gently rising trend.
The low price of oil is hugely positive for Asia, given how much of the commodity this region needs to import.
One of the reasons Asia has been outperforming broader emerging markets in the past couple of years is because earnings growth has come through.
Last year’s earnings growth of roughly 7 per cent was similar to what investors saw from the US market, but that country produced far superior stockmarket returns.
In companies across the region, there seems to be an understanding by management teams that they need to do more to drive top-line growth. The improving economic momentum will help with this, as well as expand margins.
As a result, earnings will continue to come through in Asia in 2015 and into 2016.
There is positive reform momentum across many markets in the region – such as India, Indonesia, China and the Philippines.
The reform momentum that propelled the super high levels of growth in Asia at the start of the millennium had effectively dried up in recent years. However, many new governments have realised the need for change – with new reforms required to ensure employment, growth and a continued rise in living standards.
While this is positive, investors often overestimate the pace at which reforms can be implemented and the near-term impact.
This has been the case in India in the past year, where markets have factored in near-perfect execution.
Prime minister Narendra Modi has the potential to enact real change in the country in the next several years, but experience to date has shown that some patience is needed.
A risk to Asia this year remains US Federal Reserve policy and the expected increase in the US interest rate.
Some volatility in Asian markets should be anticipated, as investors try to determine what a higher US rate would mean for the region. Any fall in the markets is likely to represent a good buying opportunity for investors with a longer-term horizon.
Some adjustments have taken place in Asia since the so-called ‘taper tantrum’ of May 2013. India certainly appears to be in a stronger position, with its current account deficit having closed, while the currency has adjusted downwards.
The other most at-risk market is Indonesia – where the currency has also adjusted down a long way, but the current account has not closed quite as much.
