Earnings growth the X factor for Asia

THE past two years have been outstanding from the perspective of equity investors but it cannot be assumed that returns of 15 per cent to 20 per cent represent the new reality, as the start to 2014 has shown.

In the Asia-Pacific, we expect a gradual pick-up in growth next year to increase the value of equities by double digits. While growth is likely to plateau mid-year at sub-trend levels, we see few domestic policy headwinds, although US Federal Reserve tapering is likely to drive further currency weakness. Other key themes include an export recovery and Debtopia (a credit cycle de-rating in South Asia) which keeps us more focused on North versus South Asia, and cyclicals versus defensives.

Asia's equity markets have been under pressure for some years, largely due to the debt overhang and the rising cost of credit. However, in our view, it is earnings growth that will continue to be key to whether Asian equities rise this year. We see some positives. Based on the 2013 year-end reporting season results, earnings increased in 2013 unlike in the previous year. Importantly, the winds are also set to be fair for this year.