Asian equities are still attractive for investors given healthy growth and strong corporate earnings, said Josh Crabb, the head of Asian equities at Old Mutual, in an interview with finews.asia. Crabb expects the bull market to run a while longer.

Looking at equity markets from a global perspective, how attractive are the Asian markets relatively speaking and why?

We have a favorable outlook for Asian equities over the next 12 months based on strong global growth, relatively cheap valuations, a general underweight in investor positioning, a stable macro backdrop in China and importantly strong corporate earnings momentum.

«Investors have hardly flinched over the escalation of rhetoric with North Korea»

Given that the Asian markets are early/mid cycle, we currently have a heavy value tilt to the fund (1.1x price to book vs 1.7x for the index) as we believe it is sectors such as financials and materials that offer the best upside potential for investors. There has obviously been a strong rotation towards growth and technology in the year to date and we think these levels are now extreme and there will be a degree of mean reversion over the coming quarters back towards value. 

What about specific segments?

Thematically we have a number of ideas in the portfolio which are continuing to gain traction including several growth areas with good valuations. A few examples are AI/IoT (9 percent) on the proliferation of AI enabled devices, Indian infrastructure (14%) on the back of Prime Minister Modi’s firm commitment to build ports and roads to support growth, and Chinese pollution (10 percent) where the Chinese government is now fully behind finally reducing pollution in a number of key cities.

With heightened geopolitical risks – North Korea, isolationism in the U.S. – are you advising your clients to exit stocks and seek more conservative forms of investments? If no, what makes you optimistic?

Investors have hardly flinched over the escalation of rhetoric with North Korea. In our view Kim Jong Un’s primary long term task is to ensure the survival of the regime and therefore he probably won’t provoke an actual war. 

«Any pullback in markets is an opportunity for investors to add to their Asian equity exposure»

From an investment perspective, it has always historically paid to believe that diplomacy will be the ultimate course of action and the U.S. probably has to accept that their policy towards North Korea in the future will be one of nuclear containment. Combined with the investment case laid out above, we therefore continue to believe that any pullback in markets is an opportunity for investors to add to their existing Asian equity exposure.

How quickly do you believe central banks will up interest rates? And how will this affect equity markets in Asia?

The robust global economy and increasingly hawkish commentary from the Fed over the past few months has seen the probability of a hike in December increase to 80 percent. Whilst most central banks appear to be withdrawing liquidity at the margin – the exception being the Bank of Japan – as long as this is gradual we think the backdrop for Asian equities remains extremely compelling.

This was the case in the 2003-2007 period with U.S. rates rising continuously, yet because of the synchronized global growth Asian markets didn’t actually peak until U.S. rates were cut. Powell has historically supported Yellen’s cautious stance on raising interest rates and it is likely he will continue down this path. 

Josh Crabb joined Old Mutual Global Investors in October 2014 as head of Asian equities. He has over 18 years’ investment experience, including at BlackRock (Hong Kong), Prudential Asset Management (Hong Kong) and Bankers Trust in Sydney. Josh holds a BCom from the University of Western Australia and has a CFA accreditation.