The Deteriorating State of Earnings in Asia

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 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 Peoples Bank of China recently announced a 100 basis point cut to the bank reserve requirement ratio to help improve liquidity. This is the fourth cut since the beginning of 2018, but with a twist — this latest action was the first unconditionalreserve requirement cut in three years.