Asian equities have underperformed the S&P 500 so far this year (as of Nov 27, 2019) as iShares Asia 50 ETF (AIA - Free Report) has added 14.9%, which fell short of the S&P 500’s gain of 25.1%. Trade tensions probably played havoc on these equities.
However, things could be different in 2020 if the United States and China manage to strike a trade deal. Though there is still uncertainty related to any deal as President Trump signed the Hong Kong human rights act lately, some Asian markets do offer value.
In this regard, J. P. Morgan highlighted two countries to outperform in 2020. Below we describe the duo and the reason for their likely outperformance.
South Korea’s central bank has enacted two rate cuts this year. In mid-October, the bank cut its policy interest rate by 25 basis points to 1.25% -- a record low. Though policymakers are open to further easing, a split vote on the latest move indicates that the next reduction may not be around the corner (read: Here's Why You Should Invest in South Korea ETFs Now).
This policy easing move will go well with the stock market outperformance. Rate cuts will ensure inflows of cheap money and the resultant rise in the stock market. Also, the United States and China are likely to sign an initial phase of trade deal, which could prove to be a positive over the long term (read: ETF Winners as 'Phase 1' Deal Eases Trade Tensions).
Further, Korean stocks offer compelling value, according to J.P. Morgan. The “region has been under-performing and is one of the best value markets globally,” per J.P. Morgan. Tech stocks of the Korean market will heat up next year. J.P. Morgan’s favorite Korean stock picks are Samsung and Kakao.
Investors should note that Korean ETFs like iShares MSCI South Korea ETF (EWY - Free Report) , Franklin FTSE South Korea ETF (FLKR - Free Report) , First Trust South Korea AlphaDEX Fund (FKO - Free Report) and iShares Currency Hedged MSCI South Korea ETF (HEWY - Free Report) have a P/E ratio in the range of 9.05x to 11.35x, which is way behind the 18.15x P/E ratio of SPDR S&P 500 ETF (SPY - Free Report) .
India ETFs are under pressure this year with the top-performing equity ETF iShares India 50 ETF (INDY - Free Report) returning only 8.9% against the S&P 500’s gain of 25.1%. A volatile global market backdrop, a rising U.S. dollar, slowing economic growth, irregular monsoon and a liquidity crisis in the shadow banking sectorhave weighed on India investing this year (read: India ETFs to Get a Short-Term Boost: Here's Why).
However, the trend could continue next year. Policy easing is rampant here also. India has been cutting interest rates drastically this year. The poll shows the RBI may slash its repo rate for the sixth successive time by 25 basis points to 4.90% at its Dec 3-5 meeting, per Reuters. We are likely to see “a bottoming out of earnings negative revisions that we’ve seen for the past year and a half now,” per J.P. Morgan.
In September, India’s finance minister Nirmala Sitharaman announced a cut in the corporate tax rate from 30% to 22% (an effective tax rate of 25.17% inclusive of all cess and surcharges for domestic companies from earlier rate of 35%) in order to boost investment and growth. J.P. Morgan expects corporate tax cut to translate to a “fiscal impulse of about $20 (billion), or 0.7% of GDP) (read: India ETFs to Tap on Corporate Tax Cuts).
Apart from the latest move, finance minister Nirmala Sitharaman “scrapped a tax on global funds, allowed concessions on vehicle purchases and hastened an infusion of an already announced 700 billion rupees ($9.8 billion) of capital in state banks.”
Notably, VanEck Vectors India Small-Cap Index ETF (SCIF - Free Report) , WisdomTree India Earnings Fund (EPI - Free Report) , First Trust India NIFTY 50 Equal Weight ETF (NFTY - Free Report) and iShares MSCI India Small-Cap ETF (SMIN - Free Report) have P/E ratios in the range of 10.47x to 17.28x, meaning that these are cheaper than SPY. This makes them good value buys for 2020.
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