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The Deteriorating State Of Earnings In Asia

Feb. 09, 2019 12:18 AM ETDXJ, EWJ, YINN, YANG, GXC, FXP, PGJ, CN, TDF, CHN, DBJP, CXSE, XPP, JPNL, FCA, YAO, YXI, HEWJ, JEQ, EWV, EZJ, JPXN, JPN, FJP, HJPX, DEWJ, KGRN, GSJY, HFXJ, JPNH, FLCH, WCHN, BBJP, FLJH, FLJP, BABA, EDU6 Comments
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Summary

  • Slowing global trade has weighed down export-oriented markets in Asia, and the regional earnings outlook has been deteriorating rapidly.
  • Real gross domestic product (GDP) growth has been decelerating in China, with pressure from both the consumer and industrial base.
  • Similar to other export-oriented markets, slowing global trade is also weighing on Japan.
  • Earnings expectations have been revised down, and if the recent strength in the yen were to continue, it would likely place additional pressure on earnings growth in the next fiscal year (which runs April 1, 2019, to March 31, 2020).

By Brent Bates, Senior Portfolio Manager on Feb 7, 2019, in Equities

When will prices in China and Japan become attractive?

Slowing global trade has weighed down export-oriented markets in Asia, and the regional earnings outlook has been deteriorating rapidly. Over the past six months, earnings expectations have been revised down 4% for the MSCI All Country Asia Pacific Ex-Japan Index.1 For December, the earnings revision ratio (which compares positive versus negative revisions) fell to 0.39, the worst reading ever recorded outside of a recession.2 The downgrades were broad-based and included all Asian economies, with 13 of 16 sectors (as defined by Merrill Lynch) experiencing at least twice as many downgrades as upgrades.1 Despite this gloom and doom, some Asian companies are beginning to look attractive using our team's Earnings, Quality and Valuation (EQV) criteria.

Chinese economic growth has slowed

Real gross domestic product (GDP) growth has been decelerating in China, with pressure from both the consumer and industrial base.3 Consumption began to slow in the second quarter of last year and has steadily deteriorated since. For example:

  • 2018 auto sales declined for the first time in 20 years, and the latest reported monthly figure showed a double-digit decline.4
  • Industrial profit growth has declined for seven consecutive months and turned negative on a year-to-year basis in November (the lowest reading since January 2016).5
  • The latest Purchasing Managers' Index reading of 49.4 moved into contractionary territory for the first time since 2016.
  • Total exports declined 4% year-over-year in December 2018.

Government steps up stimulus measures

The US-China trade war is beginning to have an impact far beyond a weakening economy - the list of manufacturers (both foreign and domestic) that have been talking about exiting China is growing. In response to these developments, the government has begun to step up stimulus levels. The People's Bank of China

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Comments (6)

A
Any thoughts on Puxin (NEW) as another play on K-12 education in China? I think the sector is undervalued with the education credits planned in China's tax overhaul.
MCH Holdings profile picture
I don't have first hand experience with EDU but my limited experience with China private education service providers (particularly, VIPKids and other online learning services) is that they provide a sub-par learning experience, and will eventually go away, regardless of the population of China, rising consumerism, etc. The million dollar question is that does EDU fall into that category as well?

PS: I believe that everything will return to a normalized state after a period of time. A good example is shared bicycles in China, which IMHO, don't make economic sense - billions were poured into share bicycles, which led to a heated market for a short while. Ultimately, these billions resulted in numerous bicycle graveyards as share bicycles begin to slowly disappear.
D. McDevitt profile picture
I'm invested in EDU and working for VIPKID on weekends. I see a very bright future for English education in China. Rich parents are willing to pay extra for "the best," (which imo is EDU and VIP), even if the ROI is a little lower.
Dugly profile picture
Whatever happens, YANG is not a good way to play it. With the price erosion associated with 3* bear ETF, and reverse splits, the adjusted value of YANG went from a high of $64,775.00 on January 25, 2010 to what it is now.
k
Thanks for the commentray.
Ben Gee profile picture
The trade war may lead to a world recession.
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