Some of the world’s biggest fund managers are betting that Asian stocks will win more allocation from global investors, driven in part by better local handling of coronavirus outbreaks.
Relative cheapness and more policy headroom are among other reasons that will lead to a reversal of the global market underweight positioning in Asia equities, according to fund managers at firms including Fidelity International Ltd., Aberdeen Standard Investments and Capital Group Cos.
“Over the longer-term, it is likely that we could see a rotation of assets toward Asia,” said Catherine Yeung, investment director at Fidelity International. “While global portfolios across the board remain underweight emerging markets, including Asia, attractive valuations and the growth profile of Asian economies and underlying corporates, could underpin such a rotation.”
The MSCI Asia Pacific Index has risen about 30% from its March low, but trails the 36% rebound in the S&P 500 Index. The undperformance comes as foreign investors have withdrawn some $140 billion from Asian markets this year, although some markets including India, Taiwan and Vietnam have started seeing net inflows this month.
While virus cases have spiked again in several U.S. states, interrupting recent equity rallies, Asia may benefit from a perception of having gotten outbreaks more under control. The overseas exodus from the region’s stock markets has started slowing.
Foreign investors have withdrawn about $18.5 billion from Asian shares outside of China this quarter. That’s well below the $99 billion in net outflows seen in the first quarter during the worst of the coronavirus fears, according to data compiled by Bloomberg.
“Global investors are likely to respond positively to the attractive attributes of Asian markets, perhaps not least the fact that the Covid-19 pandemic has been dealt with more effectively by many countries in the region,” said Steven Watson, a portfolio manager at Capital Group. Asia’s “economic consequences could likely be less negative than other regions,” he said.
Bright spots have already emerged such as improving Chinese data for retail sales and industrial enterprises profits as well as easing export declines for South Korea. In addition, the region’s central banks are seen having more ammunition still to be deployed than some global counterparts. China’s CSI 300 Index has posted at least 14 up sessions in June, the most for any month since November 2016.
“So far, Asian policy makers have followed a ‘lite’ version of the advanced economy playbook,” said Kristy Fong, investment director at Aberdeen Standard. “The region’s central bankers have room to escalate their response” amid concerns of further outbreaks.
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Another factor seen working in Asia’s favor is its relatively cheap valuations. Although Asia stocks are set for the best quarter since 2009, the MSCI Asia Pacific Index is trading at about a 26% discount to the S&P 500 on one-year forward earnings multiple and a 58% discount on price-to-book, according to data compiled by Bloomberg.
“Everything is available in Asia, and on a long-term view, it’s still on sale,” said Vikas Pershad, a portfolio manager at M&G Investments (Singapore) Pte. “For that reason, investors with global portfolios should be rebalancing capital allocations, with a greater exposure to Asia.”
Technology, health care, consumption are areas where the bulk of the expected inflows into the region’s equities will end up, according to fund managers at Capital Group, Aberdeen and M&G Investments.
There are still some risks that may derail the positive narrative for Asian equities. William Yuen, investment director at Invesco Hong Kong Ltd., expects inflows may come from reducing holdings in other asset classes. He warns that any escalation of tensions between the U.S. and China, negative surprises in the Chinese economy or a second wave of infections could cause market volatility.
Bulls like Fidelity’s Yeung expect an inflection point to come and that investors will look at other areas of the market as the recovery so far has been narrowly focused.
(Updates with fund managers’ preferred sectors in third last paragraph)
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