Asian markets grinded lower for most of 2018 with the MSCI Asia ex Japan Index (USD) falling 22% from its January high to the middle of December. 

Our analysis of past market corrections in Asia suggests that this sell off is likely closer to the end than the start. As such, we enter 2019 with cautious optimism of a better year for Asian markets. 

Two key events to monitor for Asian markets in 2019 will be the outcome of the trade war and the direction of interest rates in the US. 

On the trade war, the meeting between Donald Trump and Xi Jinping at the G20 summit on December 1 seemed to increase the likelihood of a negotiated outcome. However, the subsequent arrest of Huawei’s CFO in Canada over alleged violations of US sanctions on Iran has again escalated US/China tensions and complicated ongoing trade negotiations. 

We do not expect the Huawei issue will go away quickly, which means the supply chain stocks could remain under pressure for the foreseeable future. So while we like technology as a sector, our preference heading into 2019 is in the China internet names such as Baidu, Alibaba and Tencent rather than tech hardware companies. 

On US monetary policy, the recent comments by Chairman Powell that US rates are “just below” the neutral level could provide a supportive backdrop for many Asian markets in 2019. That’s because Emerging Markets as an asset class typically outperforms during periods of slowing/falling US interest rates and a depreciating US dollar. We have recently added stocks in current account deficit countries such as Indonesia and the Philippines to position for this outcome. 

India is another country that could benefit from a more dovish US monetary policy. India has been an overweight for Ellerston Asia since inception and continues to provide attractive opportunities as it is the fastest growing major economy in the world. Stocks we like in India are Larsen & Toubro, Jubilant Foodworks, Reliance Industries and Hindustan Unilever. 

This article was originally published in the Switzer Report's Investment Outlook for 2019. Sign up today to access the full report.