International | Jul 11 2006
By Chris Shaw
Emerging markets traditionally have more volatility than larger, more established markets, so it was little surprise Asian markets were among the hardest hit during the recent market correction. What is surprising to ABN Amro is securities analysts in the Asian region now appear to be revising down earnings expectations, in a move seen as pre-emptive in front of an expected downturn in global leading indicators.
These leading indicators are particularly useful in assessing future direction for markets in Asia, so the medium-term outlook for equities in the region is now more muddled than had previously been the case.
This can be seen by a divergence between markets still enjoying positive earnings momentum, such as Malaysia and the Philippines, compared to markets such as Hong Kong and Korea where analysts have been cutting estimates to reflect factors such as a stronger Korean currency, high commodity prices and some cyclical uncertainty.
In an attempt to avoid stocks experiencing downgrades the broker has looked for companies offering a combination of positive momentum and a Buy rating from its analysts, which provides some good news for Australian investors as this list includes both BHP Billiton (BHP) and CSL (CSL).
In terms of regional markets the broker remains overweight on Hong Kong and Korea despite the earnings downgrades, as well as Singapore and the Philippines. Neutral positions are in Malaysia and Taiwan, while it suggests being underweight China, India, Indonesia and Thailand.
The outlook remains one of caution though, with the broker advising the correction had not made markets so attractive the risks are no longer in place. UBS agrees, though it suggests investors with a six to twelve month outlook were being presented with a buying opportunity by the recent share price falls as there had not been a return to a bear market. Supporting its view, the broker estimates the average P/E ratio for Asia is now about half the average in previous bear markets of about 27 times.
Citigroup remains cautious on markets in the region as while valuations are reasonable this is offset somewhat by poor sentiment. The broker also points out emerging markets have a history of beginning to underperform global indices about three months before a peak in US interest rates, so it suggests strong performance in the region in coming months is unlikely.
See also a story about Credit Suisse’s views on the subject: Anticipating Seasonal Equity Trends.
