- Deep value is still evident in Emerging Market and Asian assets despite some strong 2016 rebounds
- Emerging market equities present good opportunities, while high yield bonds will continue to provide income
SINGAPORE (December 2016) – Eastspring Investments (“Eastspring”), the US$140 billion Asian investment management arm of Prudential plc and the region’s largest retail manager1, is looking into opportunities in “riskier” assets with deep value entering 2017.
Eastspring Investments sees opportunities in emerging market equities and high-yield bonds in 2017.. Given the attractive valuations in Asian equities relative to their developed counterparts and a shift among investors towards “riskier” assets in search of higher returns, the asset manager thinks cyclical stock could be the next asset class to rally.
Investors’ “Wall of Worry”, including concerns over the economic slowdown in China and the long-term effectiveness of quantitative easing, will likely linger into 2017. Eastspring believes better returns will be seen in the higher risk end of the spectrum, in line with a gradual increase in risk appetite as investors continue to seek solid returns.
Swing from Risk-Averse Behaviours to Asia’s Deep Value Stocks
Eastspring takes issue with the market consensus belief that low trend growth, low inflation and low rates are the “new” permanent state of affairs, arguing that 2017 could be the year in which this view is challenged.
“This consensus belief has created some extreme valuation anomalies on a cross-asset and inter-market basis. The valuation of sovereign and investment grade bonds and ‘defensive’ stocks reached an extreme high in 2016, while ‘non-defensive’ or cyclical sectors are trading near historical low valuations,” said Nick Ferres, Head of Multi Asset Solutions. “2017 might be the inflection point in transition to a new regime. With labour markets expanding and growth and profits improving in emerging markets, the greatest risk in 2017 could well be inflation and rate increases. The upside of the ‘risky’ sectors could be material given the current low valuations.”
“The global chase for both yield and low volatility returns led investors to significantly overpay for the perceived ‘safe’ stocks. As a result a significant value gap between ‘safe’ and ‘risky’ markets was created,” said Kevin Gibson, Chief Investment Officer for Equities.
“We see attractive opportunities, particularly in areas still unloved by others, for example, China, Korea and Russia. Japan also offers exceptional values where companies are mostly delivering profits in line with or surpassing expectations,” Mr Gibson added.
Corporate earnings, which are being revised upwards for the first time in over five years, as well as improving macroeconomics, are making a strong case for emerging markets, where similar price disparity exists between value and quality stocks. Given the generally attractive value of emerging markets, an earnings recovery could trigger further investor interest in 2017, according to Eastspring Investments, an assetmanager that selects stocks with high conviction focusing on strong company valuation in the long term.
Asian Bonds Appear Attractive amidst benign economic outlook
The sharp decline in energy prices in 2016 has largely been corrected. With oil prices looking to trade at US$50 per barrel, it is likely that the deflationary pressure over the past two years will unwind.
“Despite a benign fundamental outlook on the currency front, political uncertainties in the developed markets could still trigger bouts of risk aversion. Should fears trigger sell-offs that expose value, we would probably ‘risk-up’ our portfolios, particularly in the Indonesian Rupiah and India Rupee,” said Mr Ooi Boon Peng, Chief Investment Officer for Fixed Income.
The asset manager, however, reminds investors that Asian liquidity could slow in the coming year after 2016’s strong inflows in bonds. The search for returns will be more challenging in 2017 as the bond markets offer less value than in late 2015.
“The overall lower bond yields and narrower credit spreads will dictate market conditions in 2017, but we see limited reasons to be pessimistic,” added Mr Ooi. The US economy should grow between 1.5% and 2% in 2017, while the Eurozone should grow at a slightly lower 1% to 1.5%. Looking at Asia, reforms and developments, which should support the currencies, are underway in China, India and Indonesia.”
- Ends –
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About Eastspring Investments:
Eastspring Investments, part of Prudential Corporation Asia, is Prudential's asset management business in Asia. With operations in 10 Asian markets (as well as offices in North America and Europe), we have almost 2,500 employees and US$140.3 billion in assets under management (as at 30 June 2016).
We were named Asia’s leading retail fund manager for 2016 in an annual survey by Asia Asset Management. The annual survey ranks participating fund managers in Asia, ex Japan, Australia and New Zealand, based on assets sourced in the region as of June 30, 2016.
For more information on Eastspring Investments, please visit: www.eastspring.com
This press release is issued in Singapore by Eastspring Investments (Singapore) Limited (Company Reg. No: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws.
This press release is solely for information purposes and does not constitute an offer or solicitation to anyone to invest in investment products. Past performance is not necessarily indicative of future performance. Any view, opinion, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of the future performance of Eastspring Investments or any funds managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, wecannot guarantee its accuracy or completeness. Any opinion or estimate contained in this document is subject to change without notice.
Eastspring Investments (excluding JV companies) companies are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV's) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.
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1 Asia Asset Management Fund Manager Survey 2016 (Sept 2016). This annual survey ranks participating fund managers in Asia ex Japan, Australia and New Zealand, based on assets sourced in the region as of June 30, 2016.