Can Asian Markets Continue To Outperform The Rest

Asian equity markets have outperformed mature markets in 2009 thanks to continuous FII inflows amid diminishing risk-aversion among global investors and some signs of green shoots in Asia. As of June 3 2009, MSCI Asia (ex Japan) gained 35.9% ytd with India and China as the best performers, and Pakistan and Malaysia as the worst performers. Despite impressive improvements, downside risks remain due to bleak corporate earnings outlook, worries over the real economy and revival of any global risk aversion

* 2009 MSCI Asia (ex Japan) performance in USD terms: 35.9% ytd as of June 3, 2009, up 64.6% during March 2-June 3

* Best performers (ytd as of June 3, 2009): India: 55.6% | China: 51.9% | Indonesia: 49.9% | Taiwan: 47.8% | Viet Nam: 45.2% | Sri Lanka: 42.3%

* Worst performers (ytd as of June 3, 2009): Singapore: 34.1% | Philippines: 33.2% | Thailand: 31.9% | Hong Kong: 28.6% | Korea: 22.6% | Malaysia: 21.4% | Pakistan: 17.3%

* In 2009: Asia's equity market (ex Japan) have outperformed mature markets, up 35.9% ytd as of June 3 2009, while the U.S. Dow Jones Industrial Average and the S&P 500 Index fell 3.98% and 0.01% respectively during the same period.

Also, as of end April 2009, market capitalization of Asian Pacific markets ($10.2tn) has come ahead of that of European markets ($9.3tn, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.

* From March 2009: Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 2- June 3 period, MSCI Asia (ex Japan) rose by 64.6%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 32.9% and 28.3% respectively

* Valuations: Taiwanese shares are the most expensive in the region, 63.7 times reported earnings, followed by Korea (29.2x) and China (28.0x for A-shares). On the other hand, Singapore (12.5x) and Pakistan (9.3x) are cheapest when compared to their regional peers. Given China's aggressive fiscal and monetary policies to stimulate domestic economy, A-shares are valued more than B-shares (20.5x)

* 2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out

* 2009 Outlook: Asia markets will need to offer more attractive growth and valuations than the rest of the world in order to attract fund flows into the region. Asia valuations, however cheap by its own historical standards and cheaper than the U.S., are still more expensive than the 8.6x median of 46 countries (DBS). Nonetheless, given decreasing inflationary pressures and relatively healthy fiscal positions, further fiscal and monetary stimulus policies by Asian govts will able to boost the region's equity markets in H2 2009

* Upsides: AXJ region is now attractively valued, and buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance. Continuous FII inflows to Asian equity markets since early March have taken ytd net flows to a positive US$1.9bn in mid-May 2009, the most sustained inflows since November 2007

* Downsides: gloomy earnings forecasts, worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater than expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. Investors may move money to bond markets from equity markets in an anticipation of slower global economy's recovery due to the spread of swine flu. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks

* Market Integration: there is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with the US markets

* Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing govt funds to buy shares

p/s photo: Zhang Xin Yu