Monday, July 13, 2009

Can Asian Markets Continue To Outperform The Rest - Revisited


Asian equity markets have outperformed mature markets in 2009 thanks to continuous foreign institutional investor (FII) inflows amid diminishing risk-aversion among global investors and some signs of green shoots in Asia. As of July 8 2009, MSCI Asia Pacific gained 11.6% ytd with China and Sri Lanka as the best performers, and Australia and New Zealand 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.

Trends
# 2009 MSCI Asia Pacific performance in USD terms: 11.6% ytd as of July 8, up 38.7% during March 2-July 8
# 2009 MSCI Asia performance in USD terms: 11.3% ytd as of July 8, up 38.0% during March 2-July 8
# 2009 MSCI Asia (ex Japan) performance in USD terms: 29.8% ytd as of July 8, up 57.1% during March 2-July 8
# Best performers (ytd as of July 8, 2009): China: 71.5% | Sri Lanka: 56.2% | Indonesia: 53.8% | Taiwan: 47.0% | India: 42.6% | Viet Nam: 41.4%
# Worst performers (ytd as of July 8, 2009): the Philippines: 30.1% | Singapore: 31.0% | Thailand: 29.3% | South Korea: 27.3% | Pakistan: 26.7% | Hong Kong: 23.7% | Malaysia: 21.6% | Japan: 4.9% | Australia: 1.1% | New Zealand: 1.0%
# In 2009: Asia's equity market (ex Japan) have outperformed mature markets, up 29.8% ytd as of July 8 2009, while the S&P 500 Index and the U.S. Dow Jones Industrial Average fell 5.6% and 9.5% respectively during the same period. Continuous FII inflows to Asian equity markets have taken net flows to a positive US$14.4 billion as of June 24 2009, significantly up from US$10.8 billion in H1 and US$9.6 billion in H2 2008.
# Since 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- July 8 period, MSCI Asia (ex Japan) rose by 57.1%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 25.5% and 20.9% respectively.
# Valuations: Taiwanese shares are the most expensive in the region, 64.6 times reported earnings, followed by New Zealand (38.0x), China (33.1x for A-shares) and South Korea (32.1x). On the other hand, Singapore (12.1x) and Pakistan (9.7x) are cheapest when compared to their regional peers.
# 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.
# 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 U.S. 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 government funds to buy share.

Outlook
# 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. 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.
# Downsides: Goomy 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.
# Given decreasing inflationary pressures and relatively healthy fiscal positions, further fiscal and monetary stimulus policies by Asian governments will able to boost the region's equity markets in H2 2009.
# Prospects for further inflows into Asian equities remain substantial, as global portfolio continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds.
# Asian stocks have yet to reflect expectations for a powerful, synchronized recovery in the global economy as markets are still bearish on global growth and on emerging markets growth.
# Markets would likely grind higher first, before dropping by 20-30%: Catalysts for a correction are (1) flattening improvements in second derivatives; (2) softer than expected data coming out of China and; (3) a US% rally, which takes liquidity out of Asia ex.
# The recent rally in Asian equity markets might not continue due to still-weak real economic condition in many countries and the region's ultimate reliance on exports to the U.S. and EU, which means that financial-investor sentiment will remain susceptible to economic setbacks in those markets.


p/s photos: Meisa Kuroki

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