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Asia markets sustained positive momentum in Q3; sideways
movement likely in Q4 as U.S. elections are digested.
The Morningstar Asia Markets Index maintained its positive momentum in the third quarter, notching a near 8% gain over the trailing three months to Sept. 25. However, the gaps to performance between leading sectors since end-March such as technology and consumer cyclicals, to the rest of the market and lagging sectors continued to widen. Having said this, we are seeing some signs of rotation into the value names in the U.S. market and expect this trend to develop in Asia over the next six months with the earnings outlook expected to improve. In the meantime, we expect generally sideways movement as markets digest the U.S. election. Regardless, the Federal Reserve's stance on interest rates staying low for longer points to support for equities and is likely to encourage spending and/or investment given low interest income. China's PBOC is more hawkish, and the floor to interest rates there we think will help the mainland Chinese banks, alongside a slow but recovering Chinese economy.
× We see the industrials and technology sectors as fairly valued. A selective view for industrials is relevant, given a dispersion within the sector. There is little upside catalyst to technology hardware.
× We see value in the financial sector, but asset quality remains a concern and this is expected to persist for the remainder of 2020. REITs and real estate companies, particularly in office and retail, are expected to recover in the near term as lockdowns in the region slowly unwind.
× In the medium term, the energy sector is attractive on demand recovery globally, post 2020.
Exhibit 1 Discount to Fair Value Estimates Across our Asia Coverage Narrowed as Markets Recovered
Average price/fair value estimate for Asia companies under our coverage is 0.93