Expect modest rally in Asian equities over the next 12 months: Deutsche

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SINGAPORE (July 17): Deutsche Bank Wealth Management sees a modest rally in Asian equities over the next 12 months, on expectations of a supportive regional economic landscape and regional valuations.

In its latest chief investment officer (CIO) insights report, the global wealth manager projects a 12-month target of 660 for MSCI Asia ex-Japan with a rise of about 6.5%, following a period of remaining at the bottom of a 620-630 range peaking at 631 on June 26.

The index has already risen more than 20% year to date (YTD).

“We feel valuations are competitive compared to other indices as shown with MSCI Asia ex-Japan, which currently has a 12-month forward P/E ratio of 13.2, lower than that of S&P (17.5), and MSCI World (16.6),” notes Tuan Huynh, CIO Asia Pacific (APAC) and head of discretionary portfolio management (DPM) APAC, in a press release on Monday.

Looking ahead, he believes Asia is likely to be helped by strong fundamentals, ongoing reforms, regional trade cooperation, and robust consumption.

“The cyclical recovery, positive export growth, stable commodity prices and better corporate profitability from higher producer prices will also support earnings in the region,” adds the CIO.

Hyunh believes the China Yuan (CNY) is likely to be supported by official measures to stabilise the currency, after having already strengthened to around 6.78. Having averaged around 6.88 in the earlier months of 2017, the CNY is expected to weaken gradually to 6.90 in June 2018, as compared to the previous forecast of 7.10 in March 2018.

“Stable commodity prices and more visibility into US foreign policy would also be supportive. The currency’s inclusion into the SDR basket of the IMF was significant, but is not expected to have a near- or medium-term impact on CNY valuations,” says Hyunh.

“With recent data suggesting a generally stable macroeconomic environment, China can focus on growth in the absence of inflationary pressure,” he adds.

Noting that Japanese inflation is still muted in comparison to the US and the Eurozone, the CIO believes the Bank of Japan is likely to be the last major central bank to wind back its accommodating stance.

As such, he now expects the Japanese yen (JPY) to hit 115 in June 2018, down from its previous forecast of 120 in March 2018.

“JPY will, however, continue to play an important role as a global risk-off proxy, serving as a stabiliser during phases of high volatility,” comments Hyunh.  

Meanwhile, Hyunh notes that Japanese have dipped slightly despite JPY weakness, which he believes has stemmed from a global equity correction rather than from local factors.

“Continued central bank divergence should however help Japanese equities in coming months, with the Bank of Japan’s reluctance to end quantitative easing holding down the JPY.”