Emerging Asia ETFs potentially set for growth and re-rating

Jan 29th, 2013 | By | Category: Equities

In a recent research report, Mathieu L’Hoir and Qi Sun, emerging market analysts at AXA Investment Managers, came out bullish on equities in Asian emerging markets. They argue that the combination of accommodative monetary policy, declining risk aversion, rebounding economic activity and attractive valuations is strongly supportive for the region, putting it among their top equity calls.

Emerging Asia ETFs set for growth and re-rating

Emerging Asia is potentially set for strong growth and a re-rating

One way to implement this trade is via exchange-traded funds (ETFs) linked to the MSCI Emerging Markets Asia Index (MSCI EM Asia), an index which targets the precise region the AXA analysts are positive on.

Their case is underpinned by global, local and fundamental valuation considerations.

The analysts note that global systemic risks are in retreat thanks to bold actions by the world’s major central banks and progress towards a deal on the US debt ceiling. As a result there are signs that the global economy has started to improve, which in turn bodes well for EM Asia stocks due to their high sensitivity of earnings to changes in global economic activity.

Local factors also support their case for EM Asia. Domestic demand has remained resilient, supported by fiscal stimuli, record-low unemployment and steady growth in wages, which are expected to remain strong going forward, say the analysts.


Amundi ETF MSCI EM Asia (AASI)

– Provides exposure to the MSCI Emerging Markets
Asia Index, an index targeting one of the
fastest-growing regions of the world economy

– Constituent countries include China, South Korea,
Taiwan, India and Malaysia, among others

– Collateralised swap-based replication; full
transparency to underlying index constituents

– UCITS compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs, TER 0.45%,
registered for distribution across most of EU

In terms of monetary policy, L’Hoir and Sun reckon that central banks in the region will maintain an accommodative rhetoric, in a bid to support economic growth in an environment of subdued inflationary pressures. The analysts are convinced that the combination of aggressive monetary policy, declining risk aversion, attractive valuations and the rebound in economic activity is strongly supportive of EM Asia.

They argue that the strong commitment on the part of central banks to fight systemic risks has driven the risk premium into retreat.  EM Asia stock volatility and correlation are now back to their pre-crisis level, reflecting the decline in risk aversion. However, this decline in the risk premium is not yet fully reflected in current valuation multiples, opening the door for a further re-rating of EM Asia equities.

The abundant liquidity being pumped into the global system is itself strongly supportive for Asian equities, as much of the liquidity floods into Asia; essentially, “imported monetary policy stimulus from developed economies.” However, for the time being, worries about near-term inflationary pressures remain relatively muted in Asia, which should keep monetary policy in the region accommodative.

Overall, the analysts anticipate that emerging Asia GDP growth will accelerate to 7.2% in 2013 with earnings growth of around 10%. Furthermore, they believe the region’s equities are undervalued, adding further upside potential.

L’Hoir and Sun conclude: “Using our dividend discount model and factoring in the decline in the risk premium and our earnings growth estimate of 10% for 2013, the EM Asia equity market still appears undervalued by 10%. What this means is twofold: first, our expected return on EM Asia equities is not all about earnings growth but also about re-rating; second, if we assume 10% earnings growth and a correction of half of the 10% undervaluation, then we end up with 15% expected return, which ranks Asia among our top calls.”

As mentioned, ETFs benchmarked to the MSCI EM Asia index offer a direct route to this market. The index is comprised of constituents from China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Taiwan and Thailand, and is weighted by free float-adjusted market capitalisation.

In terms of country weights, China holds the top spot with 30.23%, followed by South Korea with 24.99%, Taiwan with 17.72%, India with 11.00%, and Malaysia with 5.94%. The Financials sector represents 26.52% of the fund, followed by Information Technology at 22.64%, Consumer Discretionary at 9.58%, Materials at 8.53% and Energy at 8.20%. Major constituents include Samsung Electronics, Taiwan Semiconductor, China Mobile, China Construction Bank, and Industrial & Commercial Bank of China.

For UK and European investors there are four ETFs tracking this index:

Amundi ETF MSCI EM Asia (AASI) TER 0.45%
db X-trackers MSCI EM Asia TRN Index ETF (XMAS) TER 0.65%
Credit Suisse ETF (IE) on MSCI EM Asia (CEA1) TER 0.65%

Possible alternatives include an HSBC ETF benchmarked to the MSCI EM Far East Index and an RBS ETF benchmarked to the DAXglobal Asia Index.

The MSCI EM Far East Index tracks the largest companies in China (as accessible through the Hong Kong market), Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand, while the DAXglobal Asia Index tracks the 40 largest stocks from emerging Asia, which includes China (inc HK), India, South Korea, Taiwan, Indonesia, Thailand, Malaysia, Singapore and the Philippines.

RBS Market Access DAXglobal Asia Index ETF (M9SF) TER 0.65%

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