Asia will continue to lead the world in real gross domestic product growth despite slowing economies in China and other markets, the International Monetary Fund affirmed in early May. Directors of Asia ex-Japan research generally agree but note that a selective approach to stocks and countries is becoming increasingly important.
“We expect GDP growth in the region to decelerate to 5.9 percent in 2016 versus 6.1 percent in 2015 against a backdrop of weak external demand and its attendant impact on private corporate capital expenditures,” reports Morgan Stanley’s William Greene Jr. “In addition, we forecast only limited monetary and fiscal easing. Within the region the only economies where Morgan Stanley expects growth to accelerate in 2016 relative to 2015 are India and Indonesia, while momentum will hold steady in the Philippines.”
Ernest Fong of Credit Suisse says his analysts hold similar views. “The Philippines and Indonesia are our two top picks. India should also see decent growth performance, though expectation is also high,” he says. “Economies that are vulnerable include Hong Kong and Malaysia, which are highly exposed to China-led export headwinds and have limited domestic policy ammunitions they can use to support growth.”
Money managers that invest in the region have come to rely on the sell side for guidance in making allocation decisions. The firm whose analysts exert the most influence is Morgan Stanley, which repeats in first place on the All-Asia Research Team, Institutional Investor’s annual ranking of the region’s most highly regarded sell-side researchers. Bank of America Merrill Lynch, with 30 spots, returns at No. 2. Credit Suisse repeats in third place with 29 positions, while UBS holds steady at No. 4, with 28. Citi rises one rung, to fifth place, but that modest advance belies strong gains in the firm’s team-position total, which surges from 18 to 24.
{BrightcoveVideo}
The 2016 All-Asia Research Team reflects the opinions of 3,760 investment professionals at 1,100 institutions that collectively manage an estimated $1.68 trillion in Asia ex-Japan equities.
Twelve firms are represented on this year’s roster, including two that didn’t appear last year: Goldman Sachs (Asia) and HSBC.
A total of 218 individuals are cited on this year’s team, which is limited to the top three analysts or squads in each sector, plus runners-up where applicable. The full ranking features more than 2,347 researchers, representing 60 entities, who met minimum-vote and other eligibility criteria. (Data regarding analysts and firms not appearing here are available from the Institutional Investor Research Group; for information please contact Esther Weisz at 212-224-3307 or eweisz@iiresearchgroup.com.)
Click on Leaders in the navigation table at right to see the full list of ranked firms, or Best Analysts of the Year to view profiles of the squads in first, second and third places, and to find information about when the researchers debuted in their sectors, the total number of appearances they have amassed to date, their total appearances at No. 1 (where applicable) and comments from money managers about what distinguishes each from its peers.
Also available at that link is a list of crews that earn a runner-up spot in each sector. Please note: Information about teams in the second and third positions, and runners-up, is available to subscribers only.
Asia ex-Japan securities have reached an inflection point, contends Vikram Sahu, who in March replaced Stephen Haggerty as head of Asia-Pacific research at BofA Merrill. (Haggerty was promoted to deputy director of global research.) The so-called SHUT-I sectors — staples, health care, utilities, telecommunications and Internet/software — have outperformed cyclicals by 35 percentage points in emerging markets since 2011 as the dollar has strengthened and inflation fallen, Sahu notes. The time has come to buy Asia ex-Japan cyclicals and sell SHUT-I, he adds.
“Growth stock [price-earnings ratios] have rerated from a 4 point premium in 2011 to a 10 point at the end of 2015 and have since dropped to a 7.5 point premium. This rerating correlates well with the decline in Asian inflation and lower commodities prices,” Sahu maintains. “If the dollar is stabilizing and inflation in China, India and the U.S. is bottoming, the consensus positioning of the past five years is a serious risk to investor portfolios. For those unsure of the dollar, commodities prices and inflation, at least closing the egregious overweight in defensives versus cyclicals seems prudent.”
Morgan Stanley analysts are advising just the opposite. “We expect outperformance from what we call the New Economy sectors — information technology, consumer and health care — which are geared to the transition of the region toward consumption and services-driven growth,” says Greene, a 12-time member of the All-America Research Team who succeeded Neil Perry as head of Asia research in September. “We also recommend telecoms and utilities on a selective basis for their dividend yields, which is a style that is working globally.”
The researchers have recently moderated their bearishness on materials and industrials after the strong gains in metal and mineral ore products year to date amid a recovery in demand in China, he adds, but still expect energy names to underperform.
Within the broader financial services sector, they are more upbeat on the prospects for insurance and real estate than banks.
Views are also mixed over whether China has successfully transformed its economy from dependence on exports to emphasis on domestic consumption. “In some ways, China has already rebalanced toward domestic demand post the 2008 global financial crisis,” says Greene. “This is best represented by the fall in its current account surplus from 10 percent of GDP in 2007 to 3 percent currently. However, the rebalancing was done more via increases in investment, not consumption, giving rise to the current challenges of excess capacity and loss of pricing power.”
Sahu concurs. “The growth rebound in the first quarter was largely driven by improvement in investment,” he notes. “But on a broader basis, China is well on its way to completing the transition from an export-driven economy to a domestic demand–driven one. The telltale sign of this is the decline in the current account surplus. This will remain the key transition going forward.”
It’s really too soon to tell, counters Credit Suisse’s Fong. “The current stabilization is more cyclical than structural, the latter requiring a lot more time to both implement and see fruition,” he says. “In the meantime, it is driven by demand-side policies from the government rather than structural changes in economic fundamentals, so it does not necessarily signify China has been successful in transitioning.”
Moreover, this rally is likely to last only two or three quarters. “We do not believe it is sustainable over the longer term,” he declares.
Policymakers are being pulled in opposite directions by powerful forces: China’s economic slowdown, monetary easing and weaker exchange rate on one side, and on the other the U.S. Federal Reserve in tightening mode — albeit a gradual one. “Now is the sweet spot when China is stabilizing and a Fed hike expectation is pushed out,” Fong says. “However, eventually another Fed hike will come and policymakers will have to choose whether they will defend their currencies by potentially raising rates or make or keep them lower and withstand potential capital outflows and currency depreciation.”
Most countries in Asia ex-Japan are likely to do the latter. “Their economies have become more reliant and in sync with China and out of sync with the U.S., so it does not make sense anymore to follow the U.S. rate cycle as they have done in the past,” he believes. “Most economies have high enough foreign reserves, real interest rates and other macro cushions to withstand weaker currencies.”
The region’s fastest-growing major economy, India, remains a truly bright spot, market observers agree. “The improvement in macro stability and the gradual recovery in growth in India over the last 12 months have meant that the pace of foreign direct investment has accelerated, with FDI inflows reaching an all-time high in 2015,” Greene says. “Over the longer term we do not believe India faces the 3-D problem of debt, demographics and disinflation, which means it should remain one of the more attractive growth stories.”
“India saw $65 billion of greenfield commitments in 2015 — the highest in the world, and ahead of China for the first time ever,” Fong adds. “We believe the pickup in FDI should continue. Further, with signs clearly emerging of the economy reviving — oil demand, auto demand, cement demand and so on — and economic momentum expected to further pick up, with interest rates falling and signs of a better monsoon season, markets may become more comfortable with the reported growth numbers.”
