​Andrew Gillan, Head of Asia ex Japan Equities, expects China to remain central to the key opportunities and risks for Asian equity markets in 2019.

What are the key themes likely to shape markets in 2019?

We believe that the US dollar will continue to be a big driver of how global investors view Asian equities. The likelihood is that we will see a reversal of recent strength given the peaking interest rate cycle in the US, which markets should anticipate well ahead of time. This would help to put the spotlight back on fundamentals so continued positive earnings growth can then support stronger markets. The health of the Chinese economy, and particularly the true economic impact of tariffs, will also remain important if we do not see either a resolution or a softening in America’s stance on trade. Although these concerns are legitimate, there is much more to the region’s prospects than Chinese exports. Finally, politics will become more prominent in the region, with major elections scheduled in both India and Indonesia in 2019.

Where do you see the most important opportunities and risks within your asset class?

China still provides the key opportunities and risks within Asia. On the positive side, the sheer size of the market and the high level of scepticism from foreign investors mean that we see more examples of high-return businesses at attractive multiples than in most other major markets, with the ‘A’ share market adding to this opportunity set. On the negative side, government policy can change quickly and have a significant impact on sectors, which can be difficult to forecast.

Globally, the sustained outperformance of growth versus value is expected to reverse. We have already seen this over the short term in Asia, with some value sectors proving more defensive in the market sell-off. Looking at this differently, the share prices of some higher growth technology companies in Asia have fallen much more than their earnings expectations within the broader technology sector correction so we certainly see some interesting opportunities there.

How have your experiences in 2018 shifted your approach or outlook for 2019?

Strategically, our decision to reduce our technology exposure and add to financials at the beginning of the year was correct, although our implementation could have been more aggressive. The lesson we learned is that valuation alone does not provide downside protection in the context of a broader-based sector sell-off and, similarly, positive Asian corporate earnings growth counted for little.

We continue to follow a three-to-five-year approach and we are confident that markets will reflect fundamentals over that period. Our research efforts will reflect this focus. Given valuations are close to historically low levels compared to developed market equities, we remain very positive on Asian equities for investors with a long-term time horizon.

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