US protectionism and China deleveraging pace big worries for Asian stock investors: BlackRock

(June 20): While economic fundamentals and earnings results remain strong, the MSCI AC Asia Pacific index has underperformed the MSCI AC World Index year to date. What has happened?

Equity markets plummeted in late January 2018 driven mainly by technical factors, but we were confident that the underlying drivers of corporate earnings remained solid. Global growth prospects were strong even before the new US hefty tax cuts and fiscal stimulus. Combined, we estimate these measures may add as much as one point to US GDP growth.

In an ironic turn of events – as reducing reliance on Chinese imports is a key measure in the Trump Administration to narrow its growing trade deficit – exports from China have surprised to the upside, significantly. Chinese exports doubled consensus estimates year-on-year as of April 2018. At the same time, China’s expected deceleration of economic growth post the 19th Party Congress in 2017 has yet to materialise meaningfully. In the first quarter of 2018, we continued to see strong growth, despite the pace appears to have moderated more recently. In short, we see a disconnect between the economic fundamentals which remain supportive of risk assets, and investor sentiment which sees a deteriorating picture ahead.

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