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Tokio Marine Hiroshi Yoh

Comment: Outlook for the Asia ex-Japan equity market in 2010

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Hiroshi Yoh, CIO at Tokio Marine Asset Management (London), the Japanese and Asian equities specialist, reveals his outlook for Asia ex-Japan equities in 2010.

 Our prediction that the global economy would begin its recovery during H2 2009 has proved to be accurate – China’s economy bottomed during the first quarter of 2009, followed by the manufacturing centres of Taiwan and Korea and financial centres of Hong Kong and Singapore during the second quarter while the US registered positive quarterly GDP growth in the third quarter.
 
After contracting an estimated 1% in 2009, the global GDP is now expected to grow around 3.5% in 2010. It is likely that emerging markets will lead the charge at about 6% while developed economies’ GDP will grow about 2% this year.
 
With strong domestic demand coupled with a recovery in exports boosting the region, Asia ex-Japan, in particular, is expected to deliver growth of around 8% in 2010 and will remain the centre of global growth.
 
Corporate earnings in Asia are expected to increase by an average 25-30% in 2010. This will lower the P/E ratio of Asian markets to around 14 times, which is 20% lower than the historical average of the last twenty years of 17 times.
Additionally, the yield gap between the Asian equity yield (12-month forward-looking) and the current US 10-year treasury yield is around 3.8%, as compared with the twenty-year average of about 2%. Thus, equity as an asset class will remain attractive compared to bonds barring any sharp rise in bond yields.
 
We believe the foremost issue in 2010 will be the execution of the “exit policies” as regional governments wean their economies off the stimulus programmes. That said, we expect this process to be gradual on the back of the uncertainty in H2 2010 in the developed economies, owing to the weak recovery of private consumption and investment.
 
Asian economies have high investment rates that are supported by high levels of savings. The increased value added to production of a skilful labour force and continual improvement in education levels have stimulated an increase in average salaries and consequently the real purchasing power of consumers. This, together with a rapidly urbanising population, implies strong dynamics for domestic demand.
 
2010 outlook compared to 2009: We believe the market dynamics are shifting from the liquidity-driven rally in 2009 to one driven by earnings as more Asian governments implement measures to restrain the excessive liquidity inflows that could result in ‘asset bubbles’ if left unsupervised. In this regard, our Growth at a Reasonable Price (GARP) strategy with the focus on both earnings growth and valuation should work to our advantage in the generation of alpha in time to come.

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