How are Asian exports faring lately?
Asian trade figures are often seen as a useful bellwether of the global economy and any potential improvement will provide a boost to market sentiment. The early hard data released last week (Korea’s November 20-day exports and Taiwan’s October export orders) improved compared to the previous month. The decline in Korea’s 20-day exports narrowed to -9.6% year-over-year (yoy) in November versus -19.5% yoy in October. Exports to key destinations also signaled a modest recovery. In Taiwan, the October export orders came in better than expected, at -3.5% yoy, following a decline of 4.9% yoy in September.
This is in line with the latest readings on the new orders component of the manufacturing purchasing managers’ index (PMI) for Asian countries, which remains below 50 on average but has risen slightly in recent months, despite the August escalation in trade tensions. In particular, Korea and Taiwan new export orders’ PMI have seen the biggest jumps over August-October, suggesting that the pace of export deterioration is probably slowing and we may see potential recovery ahead.
Positive developments have also been seen with the latest Emerging Market Asia (EM Asia) exports (Exhibit 1). While they remained in negative territory, the decline of overall EM Asia exports as well as exports to G3 (European Union, Japan and U.S.) have stabilized. Another green shoot is the sequential improvement in exports to China, where it recovered to -6.3% in September, from -10.2% in July.
Admittedly, these are all tentative signs and the recovery appears weak. We will need a few more months of data to confirm whether Asian trade growth has indeed bottomed. In addition, much will still depend upon the nature of any deal between the U.S. and China in the near future. We continue to expect the U.S. and China to remain engaged in trade negotiations, and breakthroughs are only likely in less controversial areas. The two countries will continue to compete in areas such as technology and regional geopolitics in Asia as well as emerging markets. As such, we remain cautious about the magnitude of the recovery given the tepid global demand and political uncertainties.
Having said that, uncertainty does not just bring challenges, it brings opportunities. Ongoing trade talks between the U.S. and China have prompted companies to divert their production capacity away from China. The phenomenon of re-onshoring, as Taiwan manufacturers shift production lines in China back to factories in Taiwan to avoid higher U.S. tariffs, coupled with the positive outlook for new growth technology sectors, including 5G infrastructure as well as artificial intelligence, have all supported Taiwan’s export sector and overall growth so far this year and likely into 2020.
Other than Taiwan, Korea is also another potential beneficiary of high-end supply chain moves and re-onshoring. In Korea, fresh product launches in the technology sector, reduced inventory overhang, government’s fiscal stimulus as well as the de-escalation in Korea-Japan tension have all helped to lift sentiment and overall export activity.
EXHIBIT 1: EM ASIA OVERALL EXPORTS AND KEY DESTINATIONS
YEAR-OVER-YEAR CHANGE, 3MMA
Source: CEIC, J.P. Morgan Asset Management.
Data reflect most recently available as of 25/11/19.
Investment implications
A more sustained recovery in exports will likely help provide further support to the Asian earnings outlook, given the close relationship between Asia’s export trend and its corporate earnings performance. Amid seemingly fading downside tail risks from geopolitics and temporary relief from growth concerns, positioning in Asia has already picked up notably in recent months and is no longer light. However, valuations are still reasonable and the current price-to-book ratio of 1.6x is 14% below the long-run average. Consensus is currently calling for 13% yoy earnings growth in 2020, versus 1% yoy in 2019 and 4% yoy in 2018. We believe the estimates for 2020 are too high, as we continue to see greater risks to the downside and need further positive economic data to confirm whether the recent ‘green shoots’ are for real.
While the Asian trade cycle is still heavily influenced by the China-U.S. trade relationship, investors should continue to pay attention to the long-term theme of structural growth story within Asia. Lifestyle and consumption upgrades, change in dietary habits from rising wealth, ongoing infrastructure development as well as urbanization will likely continue to underpin the Asian equities outlook and deliver returns to investors over the next decade.
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