Earlier this year, the fund manager began adding emerging Asia equities for the first time in several years.
Last week, the firm’s global macro research and asset allocation team upgraded emerging Asia to preferred status from neutral.
Barings is not the only firm. Emerging markets bets are gathering momentum. Blackrock recently went overweight on EM equities and Lombard Odier IM last month said it believes in a multi-year bull run for EM equities.
Currency calming
Hong Kong-based Khiem Do, who heads Barings’ Asian multi-asset team, said the decision to move EM to preferred status was taken because UK equities were becoming too expensive as a result of the poor economic backdrop. Emerging Asia equities, on the other hand, are starting to look far more attractive.
“The trend of the gently appreciating basket of Asian and emerging market currencies is good news for Asian equity markets,” he told FSA.
“A rising currency in an EM country reflects a positive sign of health in that economy, as well as a stable USD. It is almost a necessary condition to attract foreign investors into EM equity markets.”
The reason is that “most global investors who allocate funds to this asset class tend to do so on an unhedged currency basis because either the FX forward market is inefficient and illiquid, and/or the cost of hedging the USD vs a high-yielding currency is too expensive”.
Another positive factor is that China’s RMB, which has influence on regional currencies, has stabilised, Do said.
Do also believes the rate of downward earnings revisions for Asian companies has declined modestly, while the rate of upward revisions has risen modestly, suggesting improving corporate results.
In terms of geography, the team has turned positive on what Do terms the “laggard markets” of North Asia, which includes China, South Korea and the Asian part of Russia as well as Mongolia.
Japan yen woes
Despite Barings’ currency-driven optimism, Do said the knock-on effect on Japanese equities has been less sanguine.
“The rise in Asian currencies, which includes the Japanese yen, has not been greeted positively by investors in Japanese stocks,” he said. The reason is that the yen has risen sharply against the dollar over the last year while other Asian currencies have not.
“The yen has appreciated much more significantly against the US dollar – close to 20% from mid-2015 to date versus a mild rise of about 4% in the case of Asian currencies over the same period. As a result, Japanese corporate earnings have been hit with larger downgrades compared to those of the rest of Asia.”
Despite this, action being taken in the domestic economy means that Japan remains among one of Barings’ multi-asset team’s preferred countries.
“With the yen trading at close to 100 versus the US dollar, the Bank of Japan is well aware of the negative consequences of a further rise in the yen on the growth of exporting companies,” Do said.
“This, together with the recent promise by Japanese Prime Minister Shinzō Abe to deliver more fiscal spending programmes, boosted by an increasingly cheaper valuation of Japanese stocks, reinforces our stance to keep Japan in the preferred countries ranking.”
