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Monday, 14 September 2009
Risks seen for Asian stocks after rally
The medium-term risks of persistently soft US consumption and the eventual withdrawal of crisis policies will probably end a six-month honeymoon in Asian stock markets, when such risks were largely ignored.
(HONG KONG) The medium-term risks of persistently soft US consumption and the eventual withdrawal of crisis policies will probably end a six-month honeymoon in Asian stock markets, when such risks were largely ignored.
Robust, stimulus-driven economic recovery in Asia and investors’ short-term focus helped sustain the rally. Now, however, to avoid a correction, markets will require proof that the private sector demand can take over and ensure lasting growth.
In fact, the premium that stocks in Asia-Pacific outside Japan have enjoyed over the S&P 500 has already begun narrowing from its July peak in the absence of evidence that Western consumption, so crucial for Asian exporters, is returning.
The news actually reflects the opposite.
US consumer credit fell by a record US$21.6 billion in July, unemployment hit a 26-year high of 9.7 per cent last month and 46 states saw economic activity shrink in the three months to July, according to the Philadelphia Federal Reserve’s gauge.
‘The difference in this cycle from an Asian perspective is the US consumer is going to be subdued for many years to come,’ said Nick Scott, chief investment officer for Asian equities at BlackRock in Hong Kong.
‘The question is whether the natural business cycle and private investment starts to take hold after the governments and monetary policy bailed out the beleaguered economies. The risk of a double dip is higher than a normal cycle,’ said Mr. Scott, who helps to oversee US$2.1 billion in Hong Kong.
He has started loading up on larger cap stocks with consistent earnings and healthy margins, anticipating that these so-called higher quality bets will be less prone to corrective moves lower and will be sought after when a plateau in G-7 economic growth is priced in.
He shifted some money from South Korean stocks to Chinese A and B-shares, picking up property-related names, banks and some materials companies after the market fell 22 per cent last month.
Banks, in particular those with a large deposit base, will likely do well in an environment of higher interest rates because customers will benefit from more yield, Mr. Scott said.
The MSCI index of Asia-Pacific stocks outside Japan is trading at a multiple based on 12-month forward earnings estimates of 14.8 times, down from highs of 15.5 times after the Lehman Brothers collapse, according to Thomson Reuters.
The last time that valuations were north of 15 times, the average GDP-weighted policy rate in emerging Asia was around 6.5 per cent. The average is now 4 per cent, according to JPMorgan.
That means that valuations are still vulnerable to downward pressure as central banks begin to normalise monetary policy.
Swap markets now factor in central bank tightening in Australia, India and South Korea by the end of March next year. By then, the impact of inventory restocking will have largely run its course.
Bratin Sanyal, head of Asian equities with ING Asset Management in Hong Kong, agrees that prices will eventually have to reflect uncertainties beyond six to nine months from now.
‘What the market is not focused on is the medium term, which is where all the problems lie,’ said Mr. Sanyal, who oversees about US$2.5 billion in assets.
However, Mr. Sanyal believes that the China story is played out. He is steering clear of real estate developers in China and Hong Kong because of potential asset price bubbles, and believes that miners and metals producers are simply too expensive.
He added that a trend among clients is to be much more focused on the shorter term - three months ahead. So money managers have had to shift their focus as well and turn away from medium-term risks\. \-- Reuters
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Risks seen for Asian stocks after rally
Reuters
14 September 2009
(HONG KONG) The medium-term risks of persistently soft US consumption and the eventual withdrawal of crisis policies will probably end a six-month honeymoon in Asian stock markets, when such risks were largely ignored.
Robust, stimulus-driven economic recovery in Asia and investors’ short-term focus helped sustain the rally. Now, however, to avoid a correction, markets will require proof that the private sector demand can take over and ensure lasting growth.
In fact, the premium that stocks in Asia-Pacific outside Japan have enjoyed over the S&P 500 has already begun narrowing from its July peak in the absence of evidence that Western consumption, so crucial for Asian exporters, is returning.
The news actually reflects the opposite.
US consumer credit fell by a record US$21.6 billion in July, unemployment hit a 26-year high of 9.7 per cent last month and 46 states saw economic activity shrink in the three months to July, according to the Philadelphia Federal Reserve’s gauge.
‘The difference in this cycle from an Asian perspective is the US consumer is going to be subdued for many years to come,’ said Nick Scott, chief investment officer for Asian equities at BlackRock in Hong Kong.
‘The question is whether the natural business cycle and private investment starts to take hold after the governments and monetary policy bailed out the beleaguered economies. The risk of a double dip is higher than a normal cycle,’ said Mr. Scott, who helps to oversee US$2.1 billion in Hong Kong.
He has started loading up on larger cap stocks with consistent earnings and healthy margins, anticipating that these so-called higher quality bets will be less prone to corrective moves lower and will be sought after when a plateau in G-7 economic growth is priced in.
He shifted some money from South Korean stocks to Chinese A and B-shares, picking up property-related names, banks and some materials companies after the market fell 22 per cent last month.
Banks, in particular those with a large deposit base, will likely do well in an environment of higher interest rates because customers will benefit from more yield, Mr. Scott said.
The MSCI index of Asia-Pacific stocks outside Japan is trading at a multiple based on 12-month forward earnings estimates of 14.8 times, down from highs of 15.5 times after the Lehman Brothers collapse, according to Thomson Reuters.
The last time that valuations were north of 15 times, the average GDP-weighted policy rate in emerging Asia was around 6.5 per cent. The average is now 4 per cent, according to JPMorgan.
That means that valuations are still vulnerable to downward pressure as central banks begin to normalise monetary policy.
Swap markets now factor in central bank tightening in Australia, India and South Korea by the end of March next year. By then, the impact of inventory restocking will have largely run its course.
Bratin Sanyal, head of Asian equities with ING Asset Management in Hong Kong, agrees that prices will eventually have to reflect uncertainties beyond six to nine months from now.
‘What the market is not focused on is the medium term, which is where all the problems lie,’ said Mr. Sanyal, who oversees about US$2.5 billion in assets.
However, Mr. Sanyal believes that the China story is played out. He is steering clear of real estate developers in China and Hong Kong because of potential asset price bubbles, and believes that miners and metals producers are simply too expensive.
He added that a trend among clients is to be much more focused on the shorter term - three months ahead. So money managers have had to shift their focus as well and turn away from medium-term risks\. \-- Reuters
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