SINGAPORE (Nov 22): BlackRock is remaining “underweight” on Singapore given the bond-proxy nature of its market and its sensitivity to interest rate increases in the US, as well as on Malaysia for its stretched valuations and lack of interesting stock opportunities.

Nonetheless, the investment management firm is positive on the outlook for Asian equities based on continued global reflation, strong earnings momentum along with solid global capex and firming energy prices that support exports.

In a Wednesday report, Andrew Swan, Head of Asian and Global Emerging Markets Equities, highlights how the MSCI AC Asia Pacific recently topped the MSCI AC World Index’s return of 24.1% in US dollars as of Oct 31 with a 32.6% return over the 10-month period, according to Bloomberg estimates.

He believes this outperformance underscores the synchronised, above-trend global economic expansion and robust earnings growth in emerging market (EM) countries, led by Asia.

In particular, BlackRock is remaining “overweight” on China for its improving domestic fundamentals on the notion that they are feeding into better earnings, even as headlines for October and investment data came in below consensus expectations.

It also sees increasing opportunity in onshore financial and energy stocks in the country given greater choice and lower valuations, and recommends older economy plays such as energy, materials and financials.

“China’s main emphasis after the 19th Communist Party Congress will be streamlining state-owned-enterprises (SOE) and pushing ahead on structural reforms – improving the quality of growth and moving beyond the quantity of growth. The pace, breadth and timing of the growth cooling will matter for EM and risk assets,” says Swan.  

Meanwhile, Swan also likes Indonesia based on its potential for a cyclical recovery and Thailand for stock-specific reasons, particularly energy-related companies.  

He favours domestics for India, especially value stocks that can benefit from reform and the rise of rural incomes, while adding that a drop in the cost of funding would support the corporate sector and should stimulate spending and investing in turn.

“We expect India to shift its focus towards growth as a national election looms in 2019. India’s central bank policy has slashed policy rates to 6%, the lowest since 2010, thanks to big inflation slowdown to just 3.3% now from near 13.4% in 2010, according to government data,” comments Swan.

Lastly, Swan observes that the risks to Japan’s equity outlook are mostly external as they centre on geopolitics and potential spillovers to global growth in the case of a drastic slowdown in China’s economy.

“Corporate earnings, margins and return on equity are on the upswing in Japan, and equity valuations appear fairly valued despite recent gains. Japan’s current P/E ratio of 15.2 for FY17 is well below its ten-year average, which is not the case in most developed markets including the US, the UK, Germany, France and Spain,” he notes.