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Press, Journal Article
Asia ex Japan Equities—Unlocking the Value
HAVE WE REACHED AN
INFLECTION POINT?
Anh Lu
Portfolio Manager,
Asia ex Japan Equity
Strategy
Eric Moffett
Portfolio
0DQDJHU
,
Asia Opportunities Strategy
PRICE
POINT
July 2016
Timely intelligence and
analysis for our clients.
KEY POINTS
Asia ex Japan equity market valuations are currently at multiyear lows, well below
long-term average levels.
While there is attractive valuation potential at such levels, in order to unlock this
value, we need to see an improvement in corporate earnings and return on equity.
Importantly, over recent years, company management teams have slowly adjusted to
the economic realities of today, modifying practices and showing greater discipline,
particularly in relation to spending.
There is some evidence that these efforts are beginning to bear fruit, signaling
a potential inflection point for Asia ex Japan equities following years of
underperformance relative to other major equity markets.
“Are Asia ex Japan equity valuations really cheap?” This is a question that investors
have been asking for some time now, as valuations in the region have been
progressively derated in recent years. On a historical basis, Asia ex Japan equity
market valuations are well below long-term averages, with price-to-earnings (P/E) and
price-to-book (P/B) metrics currently toward the lower end of their 20-year ranges. Only
four times in history has the P/B ratio on the Asian equity market been lower than it
currently is (Figure 1).
However, while there is little doubt that the market is optically cheap, it is also true
that it is cheap for a reason, as return on equity has declined and earnings have
disappointed. With this in mind, the crucial question investors are asking is: What
needs to happen for the value in Asian equities to be unlocked?
RELEASING THE VALUE IN ASIA—WHAT NEEDS TO HAPPEN?
A range of factors have influenced the movement of the Asia ex Japan equity market in
recent years, from global monetary policy, a stronger U.S. dollar, weaker global trade
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