19 May 2021
07 April 2021 | William Lam, co-Head of the Asia & Emerging Markets Equity team.
View the Factsheet: Invesco Asian Fund (UK)
Markets have performed well since March 2020, but we believe the wide valuation discrepancies that exist between sectors is not justifiable given the breadth of earnings recovery now being seen.
There remains significant uncertainty as to how the pandemic unfolds from here. Vaccine rollout programmes are underway, but are proceeding at different paces in different countries. This, combined with new waves of infections in Europe and some Asian countries has pushed back people’s expectations surrounding reopening plans and an eventual normalisation of conditions. While policy stimulus in Asia has so far been supportive, it has been pedestrian in comparison to that seen in the US and other developed markets.
Once conditions return to normal, it is reasonable to expect a period of better global economic growth, stronger than the anaemic growth that has characterised much of the post Global Financial Crisis era. This is important given that exports continue to be the key driver of Asian earnings growth, as can be seen in the chart below.
Figure 1: Exports growth (year-on-year) and earnings revisions ratio, 3 month moving average
The strong recovery we are seeing in demand is also leading to a broadening in the earnings recovery, with industrial supply struggling to keep up with global demand. In Asia, 13 out of 16 sectors are currently experiencing upgrades in earnings revisions, compared to the average of 7 for historic earnings upturns. Once normality has returned, however, governments in developed markets will be forced to begin to chart a course back to policy orthodoxy, in our view. This is likely to be a riskier point for markets.
In recent weeks, the markets have come back. Growing expectations that a strong cyclical recovery in the US would result in inflationary pressures led to a spike in US treasury yields. Whilst a rising yield environment has historically been tough for Asian and emerging markets performance, we remain calm as, in our view, concerns about inflationary pressures in this part of the world are premature. Although stimulus measures may see some increase in demand for goods manufactured in Asia, the next leg of the recovery is much more likely to see pent up demand for service sectors such as leisure and hospitality, which have been most affected by social distancing.
Overall, we expect that conditions will remain accommodative at this stage in the recovery. Most Asian countries went into the Covid-19 crisis with relatively low levels of government debt, which has enabled them to loosen fiscal policy and means they may not need to revert to austerity once the crisis is over. Furthermore, economic growth in China is recovering without the authorities having to rely on the sort of fiscal impulse manufactured in developed economies.
Although the market currently has policy and vaccine tailwinds behind it, we feel it important not to exaggerate the likely positive impact of economic normalisation on equity valuations. At least on a historic basis, markets appear up with events but we believe there are still plenty of opportunities for bottom-up stock pickers given the wide valuation discrepancies that exist between sectors. In our view, these discrepancies are no longer justifiable given the breadth of earnings recovery now being seen.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Invesco Asian Fund (UK):
The fund invests in emerging and developing markets, where there is potential for a decrease in market liquidity, which may mean that it is not easy to buy or sell securities. There may also be difficulties in dealing and settlement, and custody problems could arise. The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
The Fund may use Stock Connect to access China A Shares traded in mainland China. This may result in additional liquidity risk and operational risks including settlement and default risks, regulatory risk and system failure risk.
Important information
All data is as at 29.02.21 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.