Asian Stocks' Potential For Growth Is Still Promising.

For Asian stock markets, we are going to raise the Korean rating to overweight, in order to seize the opportunity of cyclical rise.

China and India remain our two markets.

Because of the poor macroeconomic situation, we lowered the rating from Singapore to the US.

Besides, we maintain Malaysia, Philippines and so on.

Subtraction rating.

We still hold a neutral stance on Japanese stocks in the global tactical asset allocation.

The long awaited Hong Kong pass was finally approved in August 16th and is expected to start in December.

The expansion of investment targets and the cancellation of the total amount are a pleasant surprise.

The biggest beneficiaries will be small cap A shares, high dividend yields, H-shares, robust returns on equity, high-quality blue chips, and "new economy" leading enterprises that have a discount relative to their A shares.

Ample liquidity and low yield environment have helped Asian stocks rebound more than 20% from their lows in February.

The main central bank of Asia has improved its market atmosphere by maintaining a loose monetary stance, corporate earnings stabilization and the dawn of economic growth.

We believe that the positive driving factors of Asian stocks remain unchanged, and further upward space can be expected.

We maintain our tactical view of increasing Asian equities relative to investment grade bonds.

We believe that the Fed will not raise interest rates until December of this year, even if we expect investors to panic.

Asian stocks will continue to suffer from low yields, ample liquidity and continued expansion.

Support.

In contrast, the valuation of Asian credit bonds is expensive when the fundamentals of credit continue to deteriorate.

Though walking slowly,

Growth is stabilizing, and the GDP growth rate in the second quarter is generally higher than expected. China's August macro data also dispelled fears of a hard landing for the largest Asian economy.

On the whole, strong financial policy support keeps domestic demand stable.

As private investment and real estate market slows down (especially in China), we expect that the government will increase its expenditure to boost economic growth in the second half of the year.

Both South Korea and Japan have launched a supplementary budget plan, and infrastructure investment should continue to support economic growth in China, Philippines, Indonesia, Thailand and Malaysia.

Despite the excellent performance of Asian credit bonds this year, we are still optimistic about the potential of Asian stocks in asset class.

First of all, the risk premium of stocks remains high. Although Asian stock valuations have been lifted, the profit yield has a 5% advantage over Asian government bond yields.

Inflation in Asia is low, and most central banks still maintain a loose monetary stance.

Even though the Fed raised interest rates in December this year, many Asian markets still enjoy a positive rate of return - the stock yield is higher than the local bond yield.

Secondly, in recent years, ROE has been falling, and now it seems that the downtrend has bottomed out. It is likely to rise slightly from the current cyclical lows.

Third, from the perspective of capital flows, Asian stock market has not yet seen signs of overheating.

Asian credit debt has risen nearly 9% this year.

The global pursuit of yield, the strong demand from Asian local investors and the lack of new debt supply have brought about a brilliant performance in the bond market.

However, as we have repeatedly stressed, the overall credit fundamentals in Asia are deteriorating. When the valuation of the whole bond is very expensive, investors' credit debt exposure should be limited to the cash flow and the stable balance sheet of quality companies.

We favor telecommunications, selected real estate investment trusts (REITs), short term Chinese state owned bonds, and some Chinese local government financing platform bonds (city investment bonds) and other defensive plates.

For the cyclical industry issuers who lack financing channels both at home and abroad, we expect that the cases of breach of contract will also increase. Meanwhile, we must pay attention to the spreading effect of default cases on other enterprises in the same industry.

However, we must also point out that in addition to some cyclical industries, we believe that the risk of sudden default of JACI (Morgan communications index) issuers is still very low.

Although we can not ignore the risk of the Asian bond market's return, unless the rate of interest rises unexpectedly or the Fed accidentally releases hawk signals or unexpected macroeconomic events, the Asian bond market will not fall even if it falls even for a long time.