International | Aug 15 2006
By Chris Shaw
When the shakeout in global equity markets began a few months ago Asian bourses were among the worst hit, but have also been among the first to recover with a gain for the region of around 7% since early in July.
But it is questionable whether such gains are both justified and sustainable, with Smith Barney Citigroup being one to question the reasons behind the recent rally. As the broker notes, markets in the region have moved higher despite earnings expectations coming down sharply in the last month and since the beginning of the year.
It points out earnings growth forecasts at the start of July were for 10.9% gains this year, but by the end of the month this had fallen to 8.7%, down from 11.5% in January. Things don’t look likely to improve much in the short-term either, the broker suggesting export price data points to a further 20% drop in earnings forecasts, with the risk of downgrades comfortably outweighing upside risk currently.
Hardest hit sectors include Materials, Telecoms, Techs and those dependent on private consumption, while the more defensive Utilities has been the best performer with small increases to forecasts. The Real Estate sector has also generated reasonable performance thanks to a flat earnings outlook.
Highlighting the potential for further weakness the broker notes professional investors appear to be taking a more conservative view to the region’s prospects, as fund outflows have exceeded inflows recently in a number of markets.
JP Morgan is also negative on the outlook for Asian equities, but as part of a negative outlook on equities globally. It suggests the outlook for the world economy is actually reasonable, as while the US is slowing the slack is being taken up by other OECD economies. As a result, its view is the world economy is in the best condition for some time to withstand a slowdown in the US.
Despite this, it sees little chance of shares outperforming cash in coming months, particularly as while the US Federal Reserve has paused in its interest rate hiking cycle it doesn’t believe it has finished. It is forecasting further rate hikes in the medium-term, with rates likely to hit 6% from 5.25% currently.
But given the current pause in rates it is possible the US dollar will weaken, so the broker favours exposure to stocks that stand to benefit from stronger currencies in the Asian region, as well as those that gain from exposure to stronger domestic demand and reflationary conditions.
Country-wise the broker suggests those nations with current account surpluses are less at risk, so the broker suggests being overweight Taiwan, Singapore, China, Thailand and the Philippines and underweight Australia, Korea, Hong Kong, Malaysia, India and Indonesia.
ABN Amro is similarly long Singapore, but also remains overweight Hong Kong and the Philippines. In contrast it remains underweight China, India, Indonesia and South Korea, a view not at odds with Citigroup who notes the outlook for earnings growth in Korea is now negative and in Taiwan is likely to be revised down further.
ABN Amro makes the point though the OECD’s Composite Leading Indicator (CLI) has now turned down, meaning outperformance is unlikely from any markets. Historically though a relative position of overweight Hong Kong and Singapore and underweight Korea and Taiwan works in such an environment, so it is happy with such a relative trade.
