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WITH inflationary pressures building up in 2018, the Asian equities market is set for a bullish road ahead, as earnings are poised for stronger growth and returns expected to be good.
At an economic and markets outlook briefing on Monday, Rob Subbaraman, head of Emerging Markets Economics, Nomura, said: "Overall, we are bullish on Asian equities, not so much because we expect multiples to expand. We acknowledge that valuations are pretty rich. What we think is going to happen is earnings are going to pick up, very much in line with our growth outlook. That's going to drive pretty solid returns."
Mr Subbaraman is striking an upbeat note, in particular, for Indian, Chinese and South Korean equities.
"We're expecting 17 per cent return in local currency terms (for Indian equities). We see double digit returns in China and Korea," he said, adding that the bank is positive about the consumer sector in China.
In Nomura's global markets research report, Asia in 2018: Stretching the sweet spot, published this month, the global investment bank said that it forecast 10-15 per cent total returns for the three Chinese equities indices in 2018 on 10-15 per cent consensus earnings per share (EPS) growth forecast and largely stable valuation multiples.
Similarly, Credit Suisse has a favourable outlook for Asian equities in 2018, with factors like a "healthy macroeconomic environment and robust earnings trends" driving investors' optimism. However, it is expecting a lower return from South-east Asian equities. It forecast that an expected 10 per cent return of Singapore equities in 2018 will be the highest in the region, as the market offers a mix of cyclical exposure, benefits from higher interest rates, and trades at an "attractive" valuation, according to a press release issued this month.
Credit Suisse added that earnings growth acceleration, along with the recent pick-up in the regional macroeconomic indicators such as semiconductor export growth in South Korea, car sales in India, and consumer confidence in China, will continue as Asian markets are set to deliver 15 per cent EPS growth in 2018.
Observers have pointed out that rising inflationary pressures and rate hikes in the US are crucial factors that will determine the impact on global financial markets in the coming year. In Singapore, the Monetary Authority of Singapore expects inflation to register between 0.5-1 per cent next year, from a projected 0.5 per cent this year.
According to Mr Subbaraman, inflation could surprise consensus on the upside, and he is positive on the growth of Philippines, Indonesia, and India moving forward.
"We think they're Asia's new rising stars. We fondly nickname them Asia's tiger cubs. We see them replacing North East Asia's ageing and debt-burden tigers. We see them as Asia's new core of economic dynamism," he said.
Nomura said in its outlook report that it expects Asia's "sweet spot of solid growth", strong capital inflows, "tame" inflation, and low interest rates to stretch into 2018, underpinned by a durable global tech upcycle in terms of the manufacturing of semiconductors and chips, continued quantitative easing by the European Central Bank and Bank of Japan, and "still-loose" regional macro policies.
"The tech upswing this year has been a very strong one. We think it has legs to continue into the first half of next year. We think chip demand is broadening out to the Internet of things like AI (artificial intelligence)," Mr Subbaraman said.
He added that since Asia is a technology-intensive region, more advanced Asian countries are moving to e-commerce.
"Richer countries have ageing and declining workforces so the pressure to find new productivity . . . often involves tech."