July 24, 2017

Deutsche Bank Wealth Management expects a modest rally in Asian equities over the next 12 months due to a supportive regional economic landscape and reasonable valuations.

Asian equities have corrected slightly after rallying for much of the year, with MSCI Asia ex-Japan having remained at the bottom of a 620-630 range after peaking at 631 on June 26. Year-to-date, the index has already risen by more than 20%.

Tuan Huynh, CIO APAC and Head of DPM APAC, said, “We expect a modest rally over the next 12 months. Our 12-month target for MSCI Asia ex-Japan is 660, with a rise of about 6.5%. 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).”

He added, “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.”


The CNY has strengthened to around 6.79 having averaged around 6.88 in the earlier months of the year, and is expected to weaken only gradually to 6.90 in June 2018 (previous forecast of 7.10 in March 2018).

Huynh said, “The CNY will likely be supported by official measures to stabilise the currency. Stable commodity prices and more visibility into U.S. 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.”

With recent data suggesting a generally stable macroeconomic environment, China can focus on growth in the absence of inflationary pressure. Consumer and producer prices grew 1.5% YoY and 5.5% YoY respectively in June, rates unchanged from the previous month. Food price inflation fell for a fifth consecutive month, while core inflation crept up slightly. Money supply growth moderated slightly from May, but new yuan loans climbed slightly and above consensus.


In Japan in recent weeks, the JPY has weakened against the USD, moving back above 114 in early July. Recent JPY weaknesses contrasted against a rally earlier this year, which took it to 110 a month ago from the 117 levels at the start of the year, and looks likely to remain weak. Huynh noted, “The Bank of Japan will likely be the last major central bank to wind back its accommodative stance and Japanese inflation is still muted at the moment, compared to in the U.S. and Eurozone. We now expect JPY at 115 in June 2018 (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.”

Meanwhile, Japanese equities have dipped slightly, despite JPY weakness. Last week, MSCI Japan came down to around 956, after peaking at 966 on June 29.

Huynh commented, “We believe this 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.”