Full of Eastern promise?

Josh Crabb, head of Asian equities at Old Mutual Global Investors provides answers to some of the key questions on investors‘ minds for 2016

Which Asian stock market will perform best in 2016, and why?

We don’t believe returns in 2016 will necessarily come from the concentrated sector and country positioning which investors have hitherto been used to. That said we believe the Vietnamese stock market should outperform other regional stock markets next year given:

  • Valuations are still cheap relative to the rest of the Asian region
  • Foreign Direct Investment flows into the country remain strong as a result of the country’s low manufacturing costs (for example, Samsung and LG Electronics have now invested just under US$10bn into Vietnamese manufacturing plants)
  • The country will be one of the key beneficiaries of the Trans-Pacific Partnership trade agreement, given its manufacturing and export potential.

What are your expectations for China in 2016?

China’s transition from an investment led economy to one driven by services, consumption and value add manufacturing is already throwing up some very interesting investment ideas.  Examples include:

  • The technology import substitution theme (for example, rather than buying Apple smartphones Chinese consumers now have the option to buy ‘home-grown’ models from Xiaomi, the world’s fourth largest smartphone manufacturer, which uses many ‘Made in China’ components rather than those imported from overseas)
  • The moving up the manufacturing value chain theme (the term ‘Made in China’ is no longer derogatory as companies move into higher margin, higher value added products, courtesy of the increasing use of intellectual property rights)
  • The One Belt, One Road project (this aims to redirect the swathes of domestic overcapacity in traditional industries for regional infrastructure development. The project is  based on a revival of the historical Silk Road in an attempt to improve trade links between East and West).

What are your top three investment tips for 2016?

  • Being aligned with the themes outlined in China’s successive five-year plans have historically proved profitable for investors
  • Asian markets on balance have more tailwinds (e.g. their ability to cut rates and the likelihood of meaningful reforms) than other global emerging markets such as Brazil and Russia.   
  • It’s important to understand the changes occurring in Asia and therefore be forward looking in your investments rather than looking at historical winners.

What are the chief risks to your investment outlook in 2016?

Far from exhaustive, and in no particular order, here is a list of key risks that, we believe, could impact demand for Asian equities. They are:

  • A hard landing for Chinese economic growth
  • Premier Modi facing a much tougher political environment, thus slowing his ambitious developmental programme for India
  • A material deterioration in the US earnings outlook (potentially the result of a stronger dollar and overall softer domestic growth)
  • US interest rates rising much faster than expectations, and
  • Further political unrest in the Levant.