Societe Generale | Value Investing Continuing To Outperform in Asia

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Barron’s Asia recently spoke to Societe Generale regarding the trend of value investing in Asia following Donald Trump’s upset win in the 2016 US election race.

Société Générale S.A. is a French multinational banking and financial services company headquartered in Paris. The company is a universal bank that has offices in 11 countries across Asia Pacific, with headquarters in Hong Kong.

Here’s an excerpt from the Barron’s Asia article regarding value investing:

Value has outperformed growth since the summer and has gathered further steam since Donald Trump’s surprise win on November 8.

This trend is likely to continue next year, according to Societe Generale.

The U.S. economy is already in its eighth year of expansion (very late!) in a business cycle. But thanks to The Donald, SocGen says the business cycle will be prolonged and revised up its 2018 U.S. GDP growth and inflation target to 2.1% and 2.7%, respectively, a rise of 1.1 percentage points (wow!) and 0.5 percentage points. SocGen predicts the S&P 500 will hit 2,400 next year, versus 2,200 currently.

“We view the new growth outlook as a catalyst for value stocks, which still trade at a large discount to the broad market in spite of their recent outperformance,” wrote Frank Benzimra, Head of Asia Equity Strategy at SocGen.

And where can one find the best value? Japan.

First of all, Donald Trump serves Japan well. A rising real interest rate in the U.S. pressures the Japanese yen downwards; as a result, “the probability of the yen depreciating to JPY120 (our 12-month forecast) has risen.” A weaker yen boosts the exporter-heavy Nikkei. SocGen predicts  the Nikkei will hit 20,500 in 2017, versus 18,381 now.

Japanese stocks trade at an undemanding 15.4 times earnings.

Another market that SocGen upgraded is China:

We have been underweighting China in an Asia equity portfolio since November 2015 on growth, rising leverage and currency concerns. These concerns obviously remain… We believe the more positive price momentum observed with China offshore equities since 3Q and onshore equities in the very recent period has legs and will be sustained.

First of all, the earnings picture in China has improved. The slow path of reforms benefits short-term growth, which has stabilised over the last three quarters – and stabilising growth and PPI recovery support EPS growth.

Robust outflows out of offshore equities and the greater market opening for onshore equities are positive developments. At the time of writing, the Shenzhen Connect scheme is expected to be launched before the end of the year.

CNY depreciation remains a concern… How much would this matter for equities? The recent signal sent by markets says ‘not much’. The positive correlation between share price and currency depreciation is not as strong as it was in the past. It has even turned positive in recent weeks.

Indeed, the CSI 300 Index has risen 4.2% this month, even as the Chinese yuan fell 3% against the dollar.

And since SocGen upgraded China to Overweight, to balance its portfolio, it moved China proxies Korea and Taiwan to underweight. (See chart for the bank’s portfolio allocation for next year.)

Societe General

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