Asia Stock Laggards China and Japan Get Love From UBS, Aberdeen

Asia’s two biggest economies are showing some signs of getting to grips with problems that weighed on their financial markets in the first half of the year, and that may bode well for their equities.

That’s the view of UBS Global Wealth Management and Aberdeen Standard Investments Ltd., which cite encouraging earnings growth in China and a pickup in vaccination rates in Japan among reasons for their optimism. Japanese equities are the most preferred asset class in UBS Global’s universe, due to attractive valuations and expectations for a rebound in consumer spending.

Such confidence comes at a time when many investors see reasons to be cautious on Asia’s two largest stock markets. Betting on Chinese equities is a brave call as regulatory crackdown on the technology sector intensifies. And in Japan, many traders are waiting for the end of the Tokyo Olympics and the lifting of the capital’s state of emergency before deciding whether to enter the market.

Asia Stock Laggards China and Japan Get Love From UBS, Aberdeen

“We see greater potential in markets that have underperformed in the first half of 2021,” said Tan Min Lan, head of the Asia Pacific chief investment office at UBS Global Wealth in Singapore. “In China, one can buy the dip for the longer term, not least in A shares, even though a regulatory overhang persists near term in the offshore segment.”

Japan could even outperform on a global level as “the market is the perfect proxy for the global upturn,” she said.

Any rebound in sentiment toward Chinese and Japanese equities could help Asian stocks catch up with their global peers, given that the two markets account for more than half of the MSCI Asia Pacific Index. The regional gauge has climbed less than 3% this year, while the S&P 500 and the MSCI Europe Index have both risen more than 14%.

‘Targeted Tools’

China’s benchmark stock index, the CSI 300, has fallen 2.2% this year as the government clamped down on market speculation and traders became concerned about potential monetary tightening. While Japan’s Topix has risen 7.1%, it has trimmed earlier gains as optimism over the control of the virus was dashed by repeated states of emergency.

“We think the policy tone is turning more measured, more pro-growth in the second half,” Tan of UBS Global Wealth, which oversees more than $3 trillion, said on China. “We also think Beijing will start using more targeted tools to support the real economy.”

Chinese data published Thursday showed the economic rebound steadied last quarter, as consumer spending exceeded consensus and manufacturers stepped up investment. Economists at Standard Chartered Plc, JPMorgan Chase & Co and ING Bank NV all upgraded their China growth forecasts after the figures were released.

Of 1,187 companies listed in Shanghai and Shenzhen that have disclosed first-half earnings forecasts, 76% of the results are positive and about a third saw net profit more than double, according to the China Securities Journal.

‘Pretty Strong’

Aberdeen is betting on China’s rising middle class to help drive its equity recovery. Christina Woon, an investment manager at the firm, favors investments in areas such as domestic travel, the “premiumization” of consumer preferences for food, beverage and consumer electronics, as well as renewable energy.

“If you look at the fundamentals there, particularly as they pertain to some themes such as domestic consumption, these remain pretty strong,” she said.

UBS Global Wealth sees valuations in Japanese stocks as appealing given the company’s forecasts for 40% growth in earnings per share this year. The figure is derived from Japan’s high reliance on exports, and an acceleration in vaccination rates, Tan said.

The Topix is trading at about 15 times its forward earnings, compared with about 18 times in February, according to data compiled by Bloomberg.

Green Shoots

Aberdeen also cites the increased trend of vaccinations as helping to reduce Japan’s underperformance. Woon sees “green shoots” of improving earnings growth, particularly in the consumer and industrial automation sectors.

The outlook for shares in China and Japan looks promising on at least one other measure. The aggregate analyst forecast is for a 24% gain in the CSI 300 over the next 12 months, and a 16% rally in the Topix. That compares with just 9% for the S&P 500.

To Richard Kaye, a portfolio manager at Comgest Asset Management Japan Ltd., the prospects for both Chinese and Japanese stocks are bright for a much longer period than just the second half.

“The catch-up potential in China, the potential for margin improvements and governance improvements in Japan -- those are still very big stories that can drive profit growth for a very long time,” he said.

©2021 Bloomberg L.P.

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