SINGAPORE (Feb 7): In recent weeks, normal activities in Asia came to a standstill and borders were closed as governments fight to stop the spread of the coronavirus first reported in China.
More than 28,000 people have been infected and the virus has claimed over 500 lives. Markets, naturally, have been roiled. China’s economy, already slowing down in the last couple of years because of the trade war, will show ugly first-quarter numbers. Investment can recover down the road but consumption will be foregone permanently.
Amid a wider global backdrop of secular headwinds in the form of low inflation, low interest rates and low economic growth, JPMorgan Asset Management is maintaining the view that quality Asian growth stocks, this year, will help bring returns for investors willing to stay. So-called “growth stocks” dangle prospects of capital appreciation that comes with future growth; they differ from “value stocks”, which attract bargain-hunting investors looking for a perceived undervalued asset to own.
As an example, the top 10 holdings of JP Morgan’s Asia Growth Fund, as of end-2019, are: Alibaba, Samsung Electronics, Taiwan Semiconductor, Tencent, AIA, Ping An Insurance, Bank Central Asia, HDFC Bank, Housing Development Finance and China Overseas Land & Investment.
From JP Morgan’s perspective, these are all leading Asia ex-Japan companies that are capturing earnings growth by sitting tight on key trends ranging from lifestyle upgrades, demographic changes, to more intensified use of financial services.
Jasslyn Yeo, JP Morgan Asset Management’s global market strategist, acknowledges that the coronavirus outbreak has thrown a spanner in the works. If the outbreak turns into wider contagion across continents, this base case will no longer apply and it will be a different story.
However, based on what the medical experts are saying, the peak in terms of the number of infected patients will likely occur towards the end of this quarter. “From Q2 onwards, we will see a recovery, and, we also think, a recovery of the markets. Our base case hasn’t changed, I’d just think of it as pushed back,” Yeo said in an interview with The Edge Singapore on Feb 3. “When the number of coronavirus cases peaks, it will be the time when earnings multiples of stocks start to rise again,” she adds.
Yeo’s optimism on the Asia ex-Japan growth stocks stems from a “scarcity premium” argument. Between 2011 and today, return on equity of companies in this sector has dropped from 16% to 10%, as the operating environment has gotten tougher and will remain even more so. Broader secular trends, such as a slowing China economy, which in turn dampens growth across the region, will not help in boosting earnings either.
“If you have a cyclical recovery, ‘value’ will outperform ‘growth’ – that is the case, but temporary. We think that ‘growth’ still has a case, because, if you think about the new secular world that we are going to be in, of low growth, low interest rates, low inflation, then, the opportunities from these companies are going to be shrinking. And therefore, investors will want to pay for the scarcity premium for the higher-quality Asia ex-Japan growth companies. That’s the rationale why we still like that space,” she explains.
To be sure, Yeo is not seeing a big cyclical upswing like that of 2016 and 2017. But there is a “mini global cycle”, nevertheless. “We think [investing in] equities [is] the best way to express this view, and so, we are still overweight,” she says.
Separately, specifically for Singapore equities, JPMorgan Asset Management’s current view is that valuations are deemed “not expensive”. However, there is limited growth, at just 4%, for the stocks making up the MSCI Singapore index. Furthermore, there is near-term vulnerability of earnings downgrades. Negative factors include the coronavirus outbreak, although the estimate for now is that adverse impact will be temporary.
At the moment, the firm is “constructive” on the three Singapore banks: DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank. They all have significant exposure to China, albeit of varying degrees, as well as regional trade, which is susceptible to trade tensions. Nevertheless, the three banks are trading at attractive valuations and their sustainable dividend payout is translating to decent yields of between 4% and 5%.
