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JP Morgan: Asian equities heading for correction

Expert Investor

“I can’t tell you exactly when the correction will come and and how big it will be, but logic tells me that this small correction [so far in 2017] is very unusual,” Hui, managing director and Asia chief market strategist at JP Morgan Asset Management, said in a media briefing last week.

“Every year there is a correction in the markets,” he said. “It could be anywhere between 15% and 60%, but in 2017 we’ve only had a 2% correction, which is very small.”

Hui was referring to intra-year declines of Asian equities, defined as the highest peak-to-trough decline of the MSCI AC Asia-Pacific ex-Japan Index during the year. The average intra-year decline of the index is 20%.

August historically tended to be a tough month for the region’s equities, and especially those listed in Hong Kong, noted Hui.

  Source: JP Morgan Asset Management’s guide to the markets

Despite the risk of market correction, Hui said he was bullish on Asian equities. So far in 2017 Asian equities are up by 23% in US dollar terms, while developed markets are up by 11%, he said, adding that the positive macroeconomic backdrop in Asia will continue to support the asset class.

Investors who hold onto cash in anticipation of a market correction may miss opportunities that Asian equities offer.

“If I had cut my Asia equities position in March in anticipation of this correction for the whole second quarter, I would be kicking myself,” Hui said.

Investors should aim for a balance between loss prevention and how much potential gain they are willing to sacrifice to achieve it, said Hui. He noted that there was no way to predict when a correction would occur.

Hui said that a balanced portfolio, with around 40% in equities, could mitigate the risk of a market correction. Another approach involves maintaining an income-driven strategy until the correction comes.

 Source: JP Morgan Asset Management’s guide to the markets

Investors who share the firm’s positive view on Asian equities don’t have to put all their money in the asset class right away, but can build up their exposure over time, Hui said. A market correction would be a good entry point, he added.

Alternative to fixed income funds

Hui believes that investors looking for income are better off with Asian stocks that pay dividends, than with fixed income funds. He noted that many companies in the region had become more generous with their dividends.

Some equities yield 3%-4% in dividend or higher, he noted, in addition to offering a potential for capital appreciation with the market cycle.

Fixed income valuations in most places are already “quite lofty”, he said. “Price return has become much less of a factor [for total returns], especially in the high yield sector.”

Hong Kong and Singapore investors, nevertheless, put in more money in fixed income than equity funds during the first quarter of 2017, according to a Cerulli Associates report.

Francis Nikolai Acosta

Francis is editor for Fund Selector Asia, covering the asset and wealth management industry in Asia. He joined Last Word Media in November 2016. Previously, he was a reporter at Ignites Asia, A Financial...

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