Investment in a Minute - A stabilization of negative earnings revisions in Asian markets

What do you see as the key headlines/topics/announcements investors should watch for in the coming weeks?

Continuing data normalization in China. We wrote at the start of 2023 how investors would be watching activity gauges coming out of China for signs of post-Covid normalization. The set up for markets has indeed been one where investors have oscillated  between focusing on near term Chinese economic weakness and looking through to normal conditions. With this in mind, China will release February’s trade data on 7th March  and retail sales on 15th March. While this data will give an important benchmark for economic recovery, we would note that indicators such as traffic congestion, subway ridership and oil demand have recovered to pre-Covid levels in the first two months of the year.

What are the biggest opportunities and/or trends you are seeing now?

While the market will focus on the speed and magnitude of the Fed’s policy tightening and look for signs of thawing geopolitical tensions, we would point to a stabilization of negative earnings revisions in Asian markets after a bruising 2022. While Q4 2022 results have so far been weak (c.50% Asia ex Japan having reported so far), reopening is likely to help China lead regional EPS growth in 2023. Similarly, after a very weak tech cycle in 2022, Taiwan and South Korea should see earnings growth start to come through towards the end of the year and into 2024, on surging demand in the semiconductor space.

Which sector/s do you find the most attractive?

In our emerging market mandates we adopt a bottom up stock picking approach built around the common language of cash flow return on investment. As such we are not sector allocators. That said, we find it interesting that our approach has led the fund to carry the largest underweight to materials (6.5% underweight vs MSCI EM) for over 10 years. Despite a strong run of success in recent years underpinned by high commodity prices, we feel there is something of a natural cyclical comedown underway given high costs, labour issues and slowing demand. We would point to our process throwing up compelling opportunities in the diversified financials (see Chinese/ Korean insurers) and consumer discretionary sectors.