Asia Investment Navigator - The cyclical upturn extends into 2020


Societe Generale Cross Asset Research, the bank’s independent financial research department, published its 2020 Asia Equity Strategy Outlook “The cyclical upturn extends into 2020”.

In the report, the bank’s strategists present their views in five main themes:

  • Decent upside but no repeat of the 2016-18 bull market 
  • Earnings momentum shifting from Consumption to Technology 
  • Still some upside in China 
  • Buy the reformers 
  • From value trade to value investments
Decent upside but no repeat of the 2016-18 bull market

The last time Asian equities enjoyed a significant upturn was between 2016 and 2018, when MSCI Asia Pacific increased by more than 60%. As in 2016, we are now more bullish on earnings, which we expect to recover after two years of stagnation. Also, we find investor positioning to be quite light. But the valuation starting point is different (except for Japan), with the US widely expected to enter recession and trade tensions morphing into more complex forms of dispute. Overall, we think conditions are in place for decent but not great equity returns in Asia.

Earnings momentum shifting from Consumption to Technology 

We expect the cyclical upturn apparent in 4Q to extend into the first half of 2020. There are signs of the tech cycle bottoming, which should lead to EPS recovering. We expect North East Asia to outperform ASEAN, and Asia ex-Japan exporters to outperform domestic names. We go into 2020 with an overweight position on Korea and Taiwan.

Still some upside in China 

The strategic story is intact: for non-China investors, onshore equities offer diversification benefits, the equity risk premium is converging to international standards and policymaking has been remarkably stable. Going into 2020, we expect some upside, but more limited than in 2019. On the onshore market, the stock leadership has narrowed to a limited number of companies and industrial earnings are caught between upstream deflation and rising consumer prices. We expect a pause in China outperformance.

Buy the reformers

Growth momentum has stalled in South Asia. In India, reform momentum holds the key to further share price gains. Following the corporate tax reform announcement, equity investors expect further policy initiatives. In ASEAN markets, the room for manoeuvre with respect to reform is more limited. In Indonesia, the post-presidential-election equity market rally fizzled out due to disappointment on the pace of reforms and lack of fiscal action. We prefer India to Indonesia. 

From value trade to value investments 

We do not find equity valuations especially low. They are back to average overall, and even frothy in parts of the market (India quality names, China beverage companies, etc.). The one exception is Japan, where most metrics point to an extremely low level of valuation. In our opinion, Japan equities investing has turned from a strategy based on a weakening currency (in the early years of Abenomics) to a story about value and how to deploy cash in corporate balance sheets efficiently. There are some encouraging signs.

Hedge against a worsening of China-US economic relations

Trade tensions are easing but factored into prices, investment and export bans target advanced manufacturing firms, and Chinese equities are at risk from restrictions from US investors. We expect China-US economic relations to remain a core theme for equity investors in 2020. We advise hedging the risk of the trade dispute turning into a financial war.

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About Societe Generale Cross-Asset Research
Societe Generale Cross-Asset Research is composed of more than 200 Analysts, Strategists, Economists and Quant, combining their expertise into ‘Research-based’ and innovative solutions suited to client’ needs: fundamental studies and expert views, investment ideas and long-term strategies, trade ideas and tactical baskets, thematic and systematic indices, quant solutions. On top of its established UK and Western European base, Societe Generale Cross-Asset Research benefits from a global coverage thanks to its presence in the US and in Asia (Hong Kong, Singapore, Tokyo and Bangalore) and Societe Generale local networks in Eastern Europe.

This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.