International | Apr 19 2006
One by-product of a sustained rise in markets is it skews the expectations of investors towards the idea such high returns are sustainable over the longer-term, a view that is usually at odds with reality.
One way of assessing whether too much optimism is being built into expectations is to assume current prices represent fair value and to examine whether the earnings growth built into prices is achievable going forward. SB Citigroup has adopted this approach in an attempt to identify what risks and opportunities are present in the Asia ex-Japan region.
Conducting such a review on a country-by-country basis, the broker suggests India, Hong Kong and Taiwan are the markets most at risk given implied earnings growth is much higher than consensus forecasts in both 2007 and 2008. As the broker points out, this doesn’t mean these markets are set to fall, but it does suggest they are most at risk from the reality not living up to expectations.
At the other end of the scale, the broker suggests the least downside risk is in the Indonesian, Malaysian, Thailand and Philippines markets, as all these markets have very low levels of implied earnings growth at current levels despite higher levels of consensus earnings growth.
From a sector viewpoint the broker suggests both the industrials and technology sectors appear at risk, as implied growth rates are well in excess of consensus estimates. This leads the broker to suggest recent outperformers could in fact become the next underperformers, with the energy sector a case in point. On the broker’s numbers the sector is likely to experience an earnings decline over the next two years, compared to growth of more than 26% over the past five years.
In contrast, expectations and consensus forecasts are closely aligned in the healthcare, consumer, banking and telecoms sectors, suggesting there is likely to be less downside pressure if results fall short of expectations.
