2017 has seen Asian equity markets rally largely due to the strength of corporate earnings. At the start of the year, earnings growth expectations for 2017 were low at approximately 10%, but over the course of the year they have been revised up to 20%. The recovery has been helped by a combination of factors such as: solid global economic expansion, a lack of disruption from President Trump, falling bond yields in some Asian markets and a small earnings rerating.
What is the outlook for earnings in 2018?
In our view, the outlook for earnings growth in 2018 is broadly positive. Consensus earnings growth expectations for 2018 have been gradually moving up over the course of this year and are now close to 10%. Recently, these expectations were boosted by China’s second quarter 2017 results season, in which almost two-thirds of companies beat expectations.
Elsewhere, consensus earnings estimates for the Indian market were marginally revised upwards for the full year 2018, post significant downward revisions over the summer months. Going forward, Indian earnings growth should benefit from easier year-on-year comparisons after the government’s demonetisation of high-value currency (November 2016) and the introduction of the Goods & Services Tax (July 2017) reduced prior year numbers.
These are the main factors which dominate the outlook for 2018 Asian earnings: domestic consumption (particularly in China), global economic growth, the interest rate environment and infrastructure spending. We expect consumption to remain strong in China, with support from wage growth, and to increase in India, driven by a very gradual revival in economic growth. Elsewhere, we believe consumption may continue to be relatively subdued — in particular, the debt overhang in Korea, Malaysia and Thailand renders it difficult for these countries to stimulate consumption significantly.
Infrastructure spending, an obvious kicker to growth in much of the developed world, is also a factor that should support growth in Asia. For example, the Belt and Road (OBOR) infrastructure initiative is aimed at increasing cross-border trade within Asia and beyond. The emphasis placed on this programme by President Jinping at the recent China Party Congress suggests that 2018 will see increased stimulus as a result of its implementation.
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