Asia ex-Japan equity markets saw a revival in investor sentiment this week. The trigger: attempts by policymakers in China and Korea to boost equity market valuations and revive investor confidence. These measures follow Japan’s arguably successful efforts in recent years to improve shareholder value. While China’s measures are promising, its fundamentals will need to improve for a sustainable rally in equities to take hold.
While China equities remain a core holding in our Asian foundation allocations, Standard Chartered says it sees tactical opportunities in its state-owned enterprises sector as they respond to the government’s attempts to boost shareholder value. South Korea remains a preferred equity market in Asia ex-Japan; the latest government proposals to boost valuations supports this preference (see page 6). Globally, the US equity market, with its relatively higher return on equity, and Japan, with earnings tailwinds from a weak JPY, remain our preferred equity markets.
Reviving China’s investor confidence: China’s authorities have taken steps to stem a continued slide in its equity markets. These range from policy rate cuts, measures to boost bank lending, restricting short-selling and directing state funds to boost equity purchases. This week, it replaced its top securities market regulator. While the measures suggest a more coordinated effort to revive investor confidence, more forceful fiscal and monetary policies are needed to revive business and consumer confidence, support the property sector and reverse growing deflationary pressures – this week, data showed consumer prices slumped the most y/y since 2009. Until then, we see tactical opportunities in China’s state-owned enterprises sector, which is likely to be the first to respond to government directives to boost shareholder value through stock buybacks and higher dividend payments. The house also prefers communication services, technology and consumer discretionary sectors in China, which are likely to benefit the most from the government’s targeted policy measures.
US remains top preference globally: The stronger-than-expected Q4 23 earnings season supports preference for the US equity market globally. While average earnings growth is now estimated at 9%, up from the 4.7% expected at the start of January, preferred are communications services (+54%) and technology (+21%) sectors have delivered among the strongest earnings growth. In terms of revenue growth, three preferred US sectors are – healthcare (7.7%), technology (+7%) and communications services (+6.5%) sectors – topped the rankings on the back of structural drivers such as Artificial Intelligence, cloud computing and demand for semiconductors.
Sustained US economic resilience: January’s data showed the US economy continues to generate more jobs than expected (although falling number of weekly hours worked suggests underlying demand for labour is softening). Meanwhile, still-robust services sector and a cyclical pick-up in manufacturing suggests the post-COVID expansion could extend longer than previously expected. The Atlanta Fed GDPNow is projecting 3.4% annualised growth in Q1 2024.
Inflation pressures: Sustained economic growth amid a tight job market has raised the risk of a revival in wage pressures (average weekly earnings growth accelerated to 4.5% y/y and the Atlanta Fed’s median wage growth, while slowing, remains high at 5% y/y). Also, manufacturers have started to pay higher prices for their inputs for the first time since April (ISM report). The strong data supports our view that the first Fed rate cut will come later than the market expects (SC forecasts a June cut).
Investor diversity and investor positioning in US equities remain stretched, sustaining the risk of a near-term pullback. Nevertheless, Standard Chartered says it remains Overweight US equity markets in its foundation allocation, given strong earnings and economic backdrop. To hedge against the risk of a revival in inflation, last month the house added US short-duration inflation protected bonds to our portfolio. Other potential inflation hedges include gold, infrastructure assets and energy sector equities.
