Asian markets rebound as global recovery looks likely
Russell's Asian Barometer says March 9 may have been the lowest point for markets
SINGAPORE June 1, 2009 - In its quarterly Asian Barometer released today, Russell Investments' Asia-Pacific Investment Strategist, Andrew Pease, says that Asia's share markets have recovered in a spectacular fashion since March 9 having rebounded some 50% by late-May. But, he warns, Asia is closely linked to the global recovery story and its relatively high PE multiple means that further outperformance relative to global shares is dependent on an export recovery boosting earnings-per–share (EPS) estimates.
Pease says that it seems increasingly likely that we have seen the lowest point for global share markets and there is anticipation in the US that the recession should end sometime over the second half of 2009.
The report says Asian markets will be driven by the outlook for the global economy and share markets. However Asia's advantages are its relative immunity from the direct effect of the financial crisis (with Asia's banks mostly financed by domestic deposits and most companies having manageable debt exposures) and its exposure to a recovery in global trade.
The biggest question mark for Asia, explains Pease, is equity market valuation as the region is not cheap in an absolute sense or relative to the rest of the world. He warns that regional markets could suffer a setback if EPS estimates resume a downward trend.
The Barometer explains that Asia's economic growth outlook has been significantly downgraded since the beginning of the year. The countries hardest hit are those with the greatest direct export exposure: Singapore, Hong Kong, Taiwan, Korea and Malaysia. In contrast, the more domestically driven economies of China, India and Indonesia continue to show relative resilience to the global recession.
According to Pease, it may now be time to turn to the more export exposed markets such as Taiwan, Hong Kong, Singapore and Malaysia and away from the defensive markets of China, India and Indonesia.
Equity market valuation: not cheap but skewed by Taiwan
In the Asian Barometer Pease says that the combination of rebounding share markets and falling EPS estimates has seen the MSCI Asia ex Japan forward PE ratio rise from 11 times in January to nearly 15 times in May. The region is now trading well above its long-term above its long-term average of 12.5 times.
Explaining this Pease says "One factor that has pushed the region's PE ratio higher is the extraordinary rise in the PE multiple for Taiwan. Last November Taiwan's forward multiple was a relatively conservative 12.5 times. As at mid May this had lifted to 27 times. Taking Taiwan out of the equation takes the region's PE multiple from 15 times to to around 13.5 -leaving it broadly equal to the World PE ratio."
Asian Barometer's brief country overview of Asia ex-Japan
In its overview of specific countries, the Russell Asian Barometer looks at how each county is performing and likely near-term economic outcomes:
China remains attractive from a defensive viewpoint. Stimulus measures are flowing into retail spending and manufacturing is responding to the pick-up in global activity. China may not be the strongest market if the global recovery theme continues but it provides a good balance between insulation from a renewed global downturn and some exposure to a recovery.
Indonesia has experienced declining inflation which has allowed the central bank to cut interest rates for six consecutive months and the policy rate at 7.5% is now below the inflation rate of 7.9%. In addition, the relatively uneventful elections in April have boosted consumer confidence and lifted any lingering political risk. There is also a reasonable amount of fiscal stimulus in train with the fiscal deficit widening by 1.5% points to -2.5% of GDP this year.
India has relatively low export exposure but its reliance on global funding of its current account deficit has been a headwind for investment spending. The central bank has lowered interest rates by 425 basis points since October reversing the tightenings of early 2008. This means that monetary policy should soon provide support to growth and earnings. The victory by Congress in the recent elections has sparked a large rally and there is the risk that the optimism is overdone.
Singapore, Malaysia and Hong Kong are global cyclical recovery plays. Twelve- months ahead and EPS growth expectations are still negative in all three countries. This suggests that the global recovery is yet to be priced in and all three could perform strongly if exports recover and EPS growth expectations turn positive.
Taiwan's PE ratio looks expensive relative to the rest of the region but this is mostly because of the dramatic decline in EPS growth expectations. The extreme pessimism built into EPS expectations makes Taiwan the potential contrarian market and it could outperform if profits turn out less disastrous than currently forecast.
Korea remains the least preferred market in the Asian Barometer but Pease says Russell's views are softening because fiscal stimulus and the lagged impact of the last year's currency decline are supporting domestic demand. Pease says de-leveraging is still a risk in Korea with huge household and business debt remaining.
Not all plain sailing from here....
In his Asian Barometer conclusion Pease says "While a renewed global downturn would hit regional markets hard, we're cautiously optimistic that March 9 was the low-point for global share markets but we also expect recovery will be uncertain and that the fragile state of global banks has the potential to generate large swings in investor confidence."
A full copy of the Russell Asian Barometer is attached.
Andrew Pease is an investment strategist for Russell Investments. In his role Andrew conducts research on the economy, capital markets and investor behaviour. He has extensive financial experience as an economist, investment strategist and central banker and is a regular media commentator on CNBC Asia and Bloomberg Television.
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