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Wednesday, November 19, 2014, 09:02

Asian equity markets set to gain

By Emma Dai in Hong Kong
Asian equity markets set to gain
The start of the Shanghai-Hong Kong stocks cross-trading scheme is expected to accelerate growth in  yuan demand which, in turn, will boost investors’ enthusiasm in yuan transactions after the 20,000-yuan daily conversion limit was scrapped on Monday. (Edmond Tang / China Daily)

Asia’s equity markets are likely to deliver higher returns next year on favorable global economic conditions and a stable outlook for mainland Chinese enterprises, Goldman Sachs said, adding that the Shanghai-Hong Kong Stock Connect program is expected to pump more capital into regional markets.

“Globally, we continue to prefer equities to bonds in 2015,” Timothy Moe, chief Asia Pacific strategist at Goldman Sachs, told a media briefing on Tuesday.

“A key point is the differentiation among markets,” he stressed. “We overweight the Chinese mainland, Taiwan and India in 2015.”

“Stable and predictable earnings growth is in short supply globally,” Moe said, adding that traditional defensive sectors, such as healthcare, consumer staples, telecom and software companies, are recommended.

He warned investors about cyclical factors that could affect the energy and commodities sectors.

“In the fourth quarter, we expect growth to improve substantially in China, and its government policy to remain accommodative. The combination will be supportive of good performance in the equity markets,” said Kinger Lau, chief China strategist at Goldman Sachs.

“Chinese equities are expected to deliver high single-digit growth in earnings-per-share terms in both 2014 and next year,” he said. “Excluding banks, which are at a very low valuation, Chinese enterprises are trading at 12 times earnings. They are inexpensive compared with global and regional markets.”

With interest rates expected to rise in the US next year, the overall return of US treasury bonds is going to be “quite low”, Moe said.  “Even high single-digit returns for equities will be appealing,” he added.

In the near term, Moe said Asian markets will firm toward yearend, which has rallied less this year compared with US and European markets. “Asia has some catching up to do. Investor positioning has declined somewhat after the concentrated selling in September and October. Additionally,  third-quarter results are sufficient to drive up the markets,” he said. 

The Shanghai-Hong Kong stocks cross-trading program launched on Monday is another catalyst, said Lau. “It will benefit the Chinese equity market in the long term, from a liquidity as well as an equity profile perspective.”

“More importantly, with the stocks link, we expect the MSCI is to include China A-shares in its emerging markets index in 2015, in which case global investors will be prompted to increase their exposure to the market,” he added.

“The A-share market presents some high-yield opportunities for global investors. The average dividend yield for the global equity market is 2.5 percent. But for A-shares, the average dividend yield is about 3.5 to 4 percent. Some stocks can boost their yields to over 5 percent. This is going to be a very interesting option for global investors,” he said.

However, Lau said, at this stage, traditional long-only funds haven’t been prepared to increase their A-share allocations through the Stock Connect. “In the early days, more participants in northbound trading are hedge funds. Long-only investors need more time to set up the infrastructure and comply with all the legal requirements,” he said. 

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