Trade war just noise and Asia stocks cheap to JPMorgan Asset Management

S. Korea has become particularly cheap on the back of the trade war, while Singapore is ‘oversold’ and its banks look attractive


SINGAPORE • Cancel out the trade-war noise and there’s still plenty to be optimistic about on Asian stocks as valuations are now “very reasonable,” according to JPMorgan Asset Management.

A full-blown trade conflict is unlikely and the global economic cycle still appears normal, Richard Titherington, who oversees US$123 billion (RM496.97 billion) as the CIO for emerging markets Asia Pacific, said in an email interview.

Given its exposure to the global economy, South Korea has become particularly cheap on the back of the trade war, while Singapore is “oversold” and the city-state’s banks look attractive, he said.

“It is true that a number of headwinds have appeared,” Titherington wrote. “It is precisely in times like these that it’s important to keep a clear head and retain a disciplined focus on the fundamentals.”

While the MSCI Asia ex-Japan Index of equities has dropped about 14% from a peak in late January amid a rising dollar and US interest rates and as trade tension escalated, JPMorgan Asset still sees earnings growth for the region at around 14% this year. Asian markets have tended to perform well in previous US tightening cycles, he said.

The firm’s optimistic view contrasts with UBS Group AG and Citigroup Inc, which have just cut their year-end targets for the gauge by 11% and 19% respectively.

Attractive Valuations
South Korea’s Kospi Index is now trading at a 12-month priceto- earnings ratio of 8.6, less than the average of 10.1 over the past five years. The similar ratio for Singapore’s Straits Times Index is 12.4, down from as high as 14.6 about a year ago.

Mirae Asset Global Investments’ Rahul Chadha agrees with Titherington that valuations in Asian equities have become attractive.

“We’re still hopeful that this trade war doesn’t deepen,” the Hong Kong-based CIO said in an interview with Bloomberg TV’s Rishaad Salamat. “There are pockets of opportunity, particularly in China.”

The continued opening up of China’s A-shares and the exposure to growth they provide offer opportunities, Titherington said.

This year’s stocks correction isn’t out of the ordinary based on recent history and the current dollar strength is a bounce amid a longer-term downtrend rather than anything more structural, he said. The trade conflict will also be contained because American consumers won’t welcome higher prices for imported goods, Titherington said.

“That is not to say that equities cannot correct further: But markets currently are presenting opportunities to buy some excellent franchises at attractive valuations,” Titherington said. “Beyond the current cycle, the longer-term story of a structural shift towards higher quality corporate earnings growth is intact.”

Citi Sees Deals by Midterm in November
Meanwhile, after US moves on global trade policy that have shredded decades of trust, watch out for deals to be struck before the midterm elections in November, Citigroup Inc said, flagging a potential rebound in commodity prices toward the year-end that’s aided by still-robust fundamentals.

“US trade actions have been brutal and unilateral and have punctured the trust built up over decades of good-faith agreements,” the bank said in a quarterly commodities outlook, describing President Donald Trump’s policies as neo-mercantilist. “Our base case is for negotiations to continue and for trade deals to be done ahead of the November US midterm elections.”

Among Citigroup’s forecasts should the US and China pull back from the brink, soybeans may rally to US$9.75 to US$10 a bushel in the final quarter, it said, up from this week’s US$8.34. And copper, which last traded at US$6,215 a tonne, could hit US$6,800 in the base case, or even US$8,000 under a more optimistic scenario.

Commodity prices, especially metals and farm goods, have been pummelled after Trump imposed tariffs on billions of dollars of Chinese goods, spurring a tit-for-tat response. The US administration is also embroiled in standoffs with the European Union, Mexico and Canada.

A resolution of some or all of these conflicts may provide a political boost for Trump and the Republican Party heading into the November contests, when seats in the House of Representatives and Senate are up for grabs.

“The next one-to-two months may indicate whether a full-blown trade war happens or occasional overtures would indeed lead to a resolution,” analysts including Ed Morse said in the report. “The next half-year should see continued robust global growth, spurring higher commodity demand.”