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Over the past few months, markets around the world have witnessed value stocks outperform growth stocks for the first time in a number of years. And this is no less true in Asia.
In the first part 2021, up to the market peak on 17 February, Asian growth stocks rose 13.2%. However, after 17 February, market sentiment changed, and the initial gains were nearly all eroded as fears of a spike in inflation triggered a rotation among Asian equities from growth stocks toward more value-oriented stocks. Over the quarter, this led to value stocks rising 4.2% and growth stocks falling -0.8%*.
But will the rotation from growth to value last, or will it be a short-term phenomenon? Four managers give their views.
Edmund Harriss, co-manager of Guinness Asian Equity Income, commented: “Growth investing has been the dominant investment style in recent years, but of course it has not always been so. Between 2008 and 2015, value enjoyed a good run over growth. Since then, value’s fall from favour has been precipitous. The change in market tempo during the quarter has been abrupt and, in our view, could change again just as quickly.
“The market has suddenly come to the view that the key risk emanating from re-emergence from the pandemic is economic overheating. Not so long ago, the discussion was about economic scarring. We can all see the uneven nature of the vaccine roll out, questions over its efficacy and the degree to which life can return to a relative level of normality in the next 12-24 months. Thus, we think we need to do the hard work of uncovering value opportunities rather than seeking to position for a trend which could reverse sharply at any moment.”
William Lam, manager of Invesco Asian, agrees balance may be key. “We believe it is right to have a balanced fund at the current time,” he said. “Within the Invesco Asian, we continue to have significant exposure to tech and internet stocks but have been trimming our holdings post the strong gains seen in share prices during 2020. We have been reinvesting in selected cyclical stocks, and more recently, in the consumer staples and alternative energy sectors. In our view, the discounts currently available in these areas are attractive given the potential for earnings to recover quicker than the market expects.”
However, Paras Anand, CIO of Asset Management, Asia Pacific at Fidelity, says the move could be longer-lasting: “From a market perspective, we believe there is a strong case that we will see a shift away from the very highly-valued growth sectors towards a broadening out of market returns. This is likely to persist through the year ‒ not just in Asia, but also in markets globally,” he said. “This will be a new phenomenon for many investors who have grown used to any value rotations being short and sharp in nature, versus one that could be longer-lasting.”
He cautions: “The outlook for returns from markets ‒ whether that is bonds or equities ‒ are likely to be more modest over the coming quarters. We believe that investors should look for that margin of safety in the new capital that is put to work and consider valuation as a core part of their investment strategy.
“More broadly, we believe other recent developments such as the rapid vaccination rollouts in the US and the UK and rising US yields will be positive for Asia. Rising yields underline a more optimistic outlook for the US and the global economy in general, which will likely be good news for Asian assets. On the vaccine front, we expect to see consumption recover very quickly in these parts of the developed world, which also spells good news for the more export-orientated economies across Asia.”
Richard Sennitt, manager of Schroder Asian Alpha Plus, talks more about the outlook for Asia in this podcast:
Matthews Pacific Tiger lead manager, Sharat Shroff, added: “Across the region, we see a return to normalcy, leading to better economic prospects for businesses. While there are some signs of an uptick in inflation, it remains to be seen if these pressures will persist. Some of the inflationary pressures may have been driven by supply chain disruption and hence, may be shorter-term in nature. Major central banks in Asia have opted to leave interest rates largely unchanged in the quarter.
“There is some concern that Asian economies may suffer a liquidity crunch as interest rates start to rise in the U.S. It is worth noting that a change to interest rates is being driven by favourable growth expectations. Furthermore, compared to prior periods of an increase in interest rates, foreign exchange reserves have grown noticeably, and current account deficits of many Asian countries have switched from deficit to surplus.
“Looking ahead, earnings growth, liquidity and valuations all appear supportive of Asia’s equity markets. We expect strong corporate earnings across Asia in 2021 as the global recovery continues to expand. And valuations, which started the year slightly elevated in parts of the market, have become more reasonable.”
*Source: Guinness Asset Management, investment commentary April 2021