The best bets in Asia – and a stalled growth machine to avoid

Ajay Kapur, an analyst at Bank of America Merrill Lynch, turned bullish on emerging Asian stocks in early 2016 – just as the Asia ex-Japan index set off on a bull run, notes Assif Shameen in Barron’s. And he doesn’t think the rally is anywhere near over. In the past 40 years, he explains, there have been six major bull markets in emerging markets and Asia, with an average gain of 230%. This time we are just 60% up from the lows.

The fundamentals also suggest ample scope for further gains. Emerging markets, in general, are at an early stage in the recovery cycle after several years of turbulence. The global recovery is looking increasingly synchronised. The PMI survey of manufacturing activity across emerging markets is at a six-year high. Europe is finally strengthening. Earnings growth in Asia (excluding Japan) will be an impressive 22% this year, while stocks are up 30%, so profits, rather than rerating to higher valuations, are driving this rally, says Kapur. Finally, “for emerging markets to do well, the dollar must remain stable-to-weak, which is what I expect”. The US Federal Reserve has consistently overestimated growth and inflation. Monetary tightening is likely to progress very slowly, so the dollar should stay subdued. Kapur is keen on South Korea and China, but warns that southeast Asia looks expensive and “doesn’t have much of a technology story”.

Malaysia is especially unappealing, adds William Pesek on Breakingviews.Per-capita income “has stalled”: it seems Malaysia has got stuck in the ‘‘middle-income trap’’, with the advantage of cheap labour costs now gone but little sign of further development. The latest budget is “devoid of fresh” ideas to bolster competitiveness and instead “throws more bonuses at a bloated civil service”. Avoid.