Asian shares have had a wild ride in 2018, with major markets set to end the year in negative territory. But J.P. Morgan Asset Management likes them.
Greater China markets have so far been among the biggest losers in Asia. The Shenzhen composite has fallen by around 30 percent this year, while the Shanghai composite has chalked up a loss of more than 20 percent. In Hong Kong, the Hang Seng Index has shed nearly 15 percent.
Other Asian markets haven’t been spared. Japan’s Nikkei 225 is down more than 10 percent this year, while South Korea’s Kospi is nearly 17 percent lower.
The “market has been very difficult this year, but actually we remain long-term positive on Asia. And we think this is now a time to build core strategic positions,” Janet Tsang, Asia Pacific and emerging markets investment specialist at J.P. Morgan Asset management, told CNBC’s “Street Signs” on Friday.
Tsang is not the only one who likes Asian markets. Morgan Stanley’s chief equity strategist for Asia and emerging markets, Jonathan Garner, told CNBC on Thursday that he’s “outright bullish” on markets in Asia.
Such optimism comes as investors are increasingly worried about a global economic slowdown. Those fears have sent financial markets worldwide on a volatile ride in recent months. But Tsang said there are three reasons why investors should stay invested in Asia.
US dollar likely to weaken
The strength in the U.S. dollar has hurt Asian markets this year. That’s because investors, attracted by a robust American economy and the potential for better returns stateside, shifted their money into the United States.
But there are a number of reasons that trend could reverse, according to Tsang. First, the Federal Reserve is widely expected to stop hiking interest rates some time next year as growth in the U.S. slows down — developments that would limit the greenback’s rise.
Second, the U.S. faces both fiscal and current account deficits. A fiscal deficit means the government is spending more than what it earns, and current account deficit occurs when the value of U.S. imports exceed what it exports. Both instances are negative for the greenback, Tsang noted.
“With the U.S. Fed potentially pausing their rates (increases) some time in 2019, as well as growth in the U.S. peaking out, coupled with the twin deficits in the U.S., the dollar is likely to revert to its downward retracement,” she said.
US-China trade tensions
Many Asian economies are heavily dependent on trade and have supply chains that are linked to China. Therefore, additional tariffs imposed by U.S. on Chinese goods are also a threat to other Asian countries.
But much of the negativity from the U.S.-China trade war has been priced in by markets, Tsang said. That means stock prices have largely taken into account factors that will affect their future movements. So, she argued, markets in the region should stabilize.
“With the 90-day truce as well as China giving up more concessions, we believe that markets should be able to find some stabilization here,” said Tsang.
Earnings in ‘good shape’
Despite prevailing negative sentiment on Asian stocks, company earnings have actually remained in “good shape,” said Tsang.
In addition, stock valuations have also adjusted with a key financial metric — the price-to-book ratio — for Asian shares now running below its long-term average, she noted. The price-to-book ratio measures a company’s market value to its net assets. A lower ratio typically means a stock is undervalued.
In Asia, that ratio suggests “a very decent” returns in the next 12 months, Tsang said.
“So overall, with risks going to subside and fundamentals remain solid, we believe that Asian equities should look better in 2019,” she said.