The fundamentals for Asian equities are sturdy despite the brewing US-China trade conflict – but investor sentiment has taken the biggest hit, says BlackRock.
According to BlackRock Investment’s 2018 mid-year Asia outlook on the Asian equities and credit markets, the fundamentals for Asian equities were “solid” thanks to “strong economic and corporate earnings growth”.
“Equity markets plummeted in late January 2018 driven mainly by technical factors, but we were confident that the underlying drivers of corporate earnings remained solid,” wrote Blackrock head of Asia and global emerging market equities Andrew Swan.
“Global growth prospects were strong even before the new US hefty tax cuts and fiscal stimulus. Combined, we estimate these measures may add as much as one point to US GDP growth.”
He also pointed out that Chinese exports had “surprised to the upside, significantly” in what he called an “ironic turn of events”, and the first quarter of 2018 delivered strong growth even if the pace had slowed.
But the economic outlook has been clouded by US protectionism, Mr Swan wrote. “Investor sentiment has soured as a result.”
“In short, we see a disconnect between the economic fundamentals which remain supportive of risk assets, and investor sentiment which sees a deteriorating picture ahead.”
The US’ lack of trade policy visibility with not just China but Mexico, Canada and Europe had “unnerved investors and corporate management teams”, and stocks that would have otherwise risen solely based on fundamentals had been affected by the “heightened uncertainty”.
BlackRock head of Asian credit Neeraj Seth added: “Trade has become a hot topic and major driver of investor and market sentiment.”
“We do not expect an immediate full resolution but believe the economic impact will be less significant than the tough talk on trade suggests.
“Sentiment could be the biggest casualty and stay fragile in the near term,” Mr Seth wrote.
The investment professionals noted that increasing “US protectionism”, as well as a higher US dollar and interest rates, remained a major threat in the short-term emerging markets and Asia growth outlook.