Brexit has reversed the traditional perception of risk. Asian equities used to be considered a risky asset class compared with UK and EU equities. With heightened political and economic uncertainty in Europe, Asian equities now look like a safer option.
Brexit is likely to affect Asia in two ways: trade and sentiment. The economic impact will be felt through a reduction in trade to Europe, which accounts for around 13% of Asia's exports. Countries with some of the biggest exposure to Europe include Singapore, Malaysia and Thailand.
Sentiment towards Asian equities is likely to be correlated, especially in the short term, with the negative headlines emanating from the UK and EU. However, when the dust settles, investors will appreciate that Brexit is a European problem and only a mild headwind for Asia.
In fact, Asian equities may actually benefit from Brexit as it highlights the fact that Asia offers stronger economic growth, more stable politics and attractive valuations. Asia trades on a 12-month forward P/E of 12.4x versus the UK on 16x. In addition, investors tend to be underweight Asian equities.
Within Asia, Chinese H-shares (listed in Hong Kong) appear exceptionally attractive in terms of valuations as they trade on a forward P/E multiple of just 7.2x. Hence, H-shares are the cheapest market in Asia and second cheapest in global emerging markets.
Is Asia's dividend story under threat?
Only Russia is cheaper on a multiple of 6.9x. Brexit is likely to have only a marginal impact on the Chinese economy.
Indonesia is another large Asian economy which enjoys strong economic growth and a stable government that is successfully implementing reforms. Inflation and currency volatility have been brought under control and consequently interest rates are on a downward trajectory. The economy is largely domestically driven and therefore less likely to be impacted by Brexit.
Naturally, Asian equities are exposed to risks, but these have been discussed ad nauseam by the media and are therefore largely priced into valuations. Any Black Swan event is arguably more likely to originate in Europe (eg, the potential collapse in the EU) or the US in this election year.
Daniel Tubbs is the head of the global emerging markets team at Mirabaud Asset Management
Bull Points
• Brexit makes Asian equities look comparatively safe
• Asian valuations are attractively priced
Bear Points
• Brexit is likely to impact Asian exports to the UK and EU
• Sentiment towards all equities, including Asia, will be hurt by further negative news
