“Asian markets need to come to terms with the realisation that tight credit, fund outflows, stagnant exports, and falling aggregate foreign direct investment, are here to stay.
“For at least the next 12 months, we do not anticipate a return to highly correlated Asian markets driven by shifts in top-down market sentiment. A number of markets, particularly those in emerging economies, may find the next few years challenging.
“Investors will therefore need to seek particular themes that take advantage of the changing dynamics and opportunities in the region. For instance, we are currently interested in online advertising and the southeast Asian automotive supply chain, as areas that present attractive longer term upside.”
Mr Erlanson added that many Asian market commentators and investors seem to be taking excessive comfort in the basic assumption of mean reversion – for example, focussing on balance of payments, currencies, and the rate environment.
“Many Asian market commentators are basing their relatively positive outlooks for 2014 on three main beliefs – that global trade will recover; that there will be a managed credit contraction in China; and that developed market currencies will continue to outperform emerging market currencies (except for China and Japan).
“However, these three beliefs do not take into account the fact that trends experienced in 2013, such as tight credit and stagnant exports, are not temporary aberrations but part of a broader shift in emerging market growth models.
“At Seres, we believe that faith in a recovery in global trade is misplaced, while any outperformance in developed market currencies will have little bearing on stock prices in emerging Asia or China. In addition, regardless of how well managed or gradual the credit contraction is in China, it will not necessarily help China-related stocks,” Mr Erlanson said.
Seres is instead focussing on three emerging trends that could lead to a rapid change for Asian markets and stocks – the Trans-Atlantic Free Trade Agreement (TAFTA), Japan’s political engagement in the region, and Asian credit contraction.
“TAFTA could potentially make the European market more competitive for Korean, Japanese and Chinese exports, by reducing tariffs, eliminating state subsidies, and coordinating regulation for one-third of global trade.
“Secondly, Japan’s increasingly active political engagement with ASEAN, India and the Middle East/Africa could also have a significant impact in the Asian region. The Abe administration is seeking to duplicate in these markets the investor/mentor/customer role it has played in Thailand and other ASEAN markets for the past three decades.
“Finally, the credit contraction across Asia will have a major impact, particularly in those markets where credit from foreign sources has been most abundant, such as Korea and China.
“These three emerging trends have been much discussed, but we don’t believe the full impact of them has been analysed and taken into account,” Mr Erlanson said.
Chief Investment Officer – Seres Asset Management