By Joohee An
The surprise announcement in September that the Fed ‘tapering’ of quantitative easing (QE) would be delayed has greatly improved risk appetite for emerging market equities, at least for now. This has provided relief for emerging market risk assets, which have suffered following Bernanke’s announcement in May of the conditions under which QE would be scaled back.
While to a certain extent the market overreacted to fears over tapering, initially selling off indiscriminately, the announcement has brought into sharper focus the macro issues underlying particular emerging market economies. Asian equities pullback was, for instance, far more pronounced in South Asia, where current account deficits, high inflation and currency depreciation showed weakness in the face of a QE taper.
This divergence of macro factors is evident also in the market reaction to the postponement of tapering, as liquidity flows diverge between North Asia (Korea, Taiwan, Hong Kong) versus South Asia (Asean countries, India) has continued.
QE aside, fundamentals across Asia continue to improve. Most of the data coming out of China, for instance, demonstrates signs of cyclical improvement, which may help spur regional economic growth. Moreover data from South Asian countries is showing more positive signs. For example, Indonesian inflation in September and a trade surplus in August exceeded market expectations.
Further volatility can be expected in the short term as the exact timing of QE tapering becomes clearer, in addition to potential headwinds following the continuation of the US government shutdown and fears over the ability of the American political system to deliver a timely resolution to the looming debt ceiling issue.
How should investors navigate this environment? Faced with these macro uncertainties, investors with a medium to long-term horizon should focus on finding high quality names and trends obscured by the current market white noise.
In particular, investors should not lose sight of the growth of the Asian middle class, estimated to reach 960 million by 2020. Of course, for some time investors have realised that the Asian consumer has the potential to power future global growth and consumption. A well-trodden story in some respects, many of the low-hanging fruit have been picked.
However, this is not to say there are not plenty of hidden opportunities. Whereas the obvious consumption stories have been largely priced in, for instance well known designer brands, the real opportunities lie in anticipating where consumer trends will develop. Of particular importance is to search across the income spectrum for consumption trends in the high/ middle/low-end Asian consumer.
One such story is the rapidly expanding internet sector. Here consumers are moving towards two ‘mega trends’: ‘Mobilisation’, involving the rapid growth of smart phones and tablet PCs and ‘Ecommerce’, where interestingly domestic players tend to take all the benefits, as opposed to sharing with global players such as Google. In both trends growth momentum is continuing to strengthen as penetration is still low in some areas.
Similarly there are some interesting names which will benefit from growing demand for tourism in North Asia, especially from Chinese travelers. The Macau gaming sector, a prime tourist hotspot, continues to grow strongly on the back of strong demand and growing purchasing power. The Chinese government’s long-term plan for improvement in infrastructure and the growing contribution of mass segments bode well for long-term growth of Macau gaming operators.
Asian equities will continue to experience short term volatility resulting from macro events, most obviously Fed tapering and fears emanating from the US government shutdown and debt ceiling. While investors should, of course, be mindful, the Asian equity space contains exciting stories for investors willing to look beyond the obvious to the hidden opportunities.
Joohee An is senior portfolio manager of the Asia Great Consumer fund, Mirae Asset Global Investments
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