The discount in emerging Asia equities following the strong rally in developed markets last year should narrow in 2014 and select Asia-Pacific markets look attractive, bolstered by continued growth in consumer spending, according to Mirae Asset.

The discount in emerging Asia equities following the strong rally in developed markets last year should narrow in 2014 and select Asia-Pacific markets look attractive, bolstered by continued growth in consumer spending, according to Mirae Asset.

In 2013, developed equity markets rallied strongly – in the case of the US by more than 30 per cent – but many emerging market indices languished. The prospect of hot money flows into Asia reversing due to US Federal Reserve tapering of quantitative easing has helped switch performance around. The MSCI World Index measure of developed countries’ equities posted total returns (capital growth plus reinvested dividends) of 26.7 per cent; the MSCI EM Asia Index, on the other hand, fell by 5.16 per cent in 2013. Average valuations on most emerging market shares (not just in Asia) are about a quarter below their level in 2009, while they are mostly unchanged in Europe and the US.

The comments from Mirae Asset come at what remains a difficult period in the emerging market space; a number of wealth mangers, such as UBS and Societe Generale, for example, see further headwinds, although longer term factors, such as young populations and the expansion of a consumer class, still are favourable for the sector.

"Mirae Asset believe the valuation gap will narrow throughout 2014 as investors become more confident in the Asian growth story through higher visibility in China's transition towards a market economy and a growth revival in India and Indonesia through progressive leadership after the elections," the firm said in a note.

With China embarking on structural reforms, and India and Indonesia, among other countries, facing key elections, uncertainties remain about emerging Asia, Mirae Asset, which oversees around $58 billion of assets under management, said in a note about its 2014 positioning.

China

The firm said reforms in China are expected to start with liberalisation of certain industries; the Shanghai Free Trade Zone will be a test-bed for such changes and should be closely watched.

In India, the asset manager said the country’s central bank has a “new and credible governor [Raghuram Rajan] who has already has instituted effective, forward-looking measures including plans of financial reform”.

As far as South Korea and Taiwan are concerned, Mirae Asset said both countries have struggled to see sharp recoveries in their economies, even though both these export-driven nations should benefit from an upswing in developed countries’ economies. These nations also are hampered by ageing populations, it said.

In the southeast Asia region, there are clear worries concerning upheaval in Thailand, and to some extent, uncertainty in Indonesia, Mirae Asset said, but went on to note: “However, ASEAN's favourable demographics are important to the equity growth story and, if backed by good governance, may provide another investment opportunity for investors.”

Likes

Mirae Asset said it is investing in consumption themes, especially in those underpenetrated, rapidly growing segments such as branded snacks, travel and entertainment, luxury goods and healthcare. It is also bullish about consumer-focused banks and insurance companies of China, India and ASEAN as they may benefit from the rising consumption and retirement savings trend.

Another area it likes are renewable energy sectors in China, as the Asian giant moves – or tries to move – to higher quality and sustainable growth, the firm said. Finally, it is attracted to the e-commerce, IT services and smartphone sectors.

Last week, CrossBorder Capital, a firm monitoring capital flows, says emerging markets are still suffering from weak foreign capital inflows. It warns that unlike 15 years ago - shortly after the Asia market crisis period of 1997-98 - most emerging market economies are now reliant on China, and particularly, China's capital spending. A deceleration in the pace of Chinese GDP growth, as seen recently, is a downside risk factor.