Asia’s technology development brings disruption to traditional industries

Paul Chan, Head of Multi Asset & Hong Kong Pensions at Invesco, discusses his latest views on the Asian market and how pension investors should position themselves.

Sep 28, 2017 | Paul Chan

Global equity markets rallied in the first half of the year, with Asia hitting new peaks across multiple markets. But as the fervor starts to recede, investors are becoming cautious of this surge’s sustainability.

Q: Under the backdrop of the stellar global equity performance in the first half, what is your outlook on Asia for the rest of the year?

The Asian equity market had a thrilling ride in the first half, with the MSCI Asia ex-Japan Index recording 23%1 growth on the back of strong carry trades to Asia as a result of a weaker US dollar and difference in interest rates. In the “old economy” segment, which consists of traditional blue-chip industries, the market saw a cyclical pickup with earnings improvement similar to that in Europe. Banks and commodity-related companies were particularly outstanding. On the other side of the spectrum, the “new economy”, characterized by high-growth companies that are on the cutting edge of technology, had significant earnings upgrades and structural growth. The combined strengthening of the “old” and “new” economies has sent South Korea’s KOSPI index upward for eight consecutive months through July 2017.2

Going forward, however, this uptrend may slow as commodity price have already rolled over. Asia will face pressure and could experience volatility from more US rate hikes and the Federal Reserve’s normalization of balance sheet, which will tighten USD liquidity and drive carry trade costs up, deterring US fund flows to Asia. It is also doubtful whether USD’s weakness will continue into 2018 given the anticipated monetary policy and the considerable depreciation already priced in during the first half of 2017.

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1 Bloomberg, total return in USD from 30 December 2016 to 30 June 2017.
2 Bloomberg, data in KRW as at 31 July 17, represented by Korea Stock Exchange KOSPI Index.