Asia Investors get picky as earnings estimates weaken

One of the pillars supporting a rally in developing-nation stocks is starting to look shaky, at least in some parts of Asia.

Along with robust economic growth and relatively low valuations, improving earnings have pushed the region’s shares to levels unseen in almost a decade.

But Credit Suisse Group AG is sounding a note of caution, saying steep gains in South Korean income projections are masking declines in other markets.

While the consensus earnings estimate for the MSCI Asia ex-Japan Index is 7.5% higher since June 2016, that reverses to a 1 % decline if Korean equities are taken out, the Swiss-based bank said in a July 19 note.

One-year forward earnings per share estimates for Philippine and Malaysian companies in the gauge are down 26% and 5.9%, respectively, in dollar terms over the period, according to data compiled by Bloomberg.

That’s prompting a more selective approach from some investors.

“If we don’t get any upgrades it will be harder for the market to push higher as it’s no longer cheap,” said Joshua Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong, whose Asian stocks fund has returned 25% over the past year to beat more than three-quarters of its peers. “This earnings season will be important to see where the beats will be.”

South Korean and Philippine banks can still see some gains, while Indian and Indonesian infrastructure stocks remain attractive, Crabb said.

The main driver for downgrades in Asia ex-Japan is “expensive” Indian and Indonesian equities, Credit Suisse strategists Sakthi Siva and Kin Nang Chik wrote in the note.

The lender said it was “underweight” those markets, along with Malaysia and the Philippines.

“India just doesn’t have earnings power at all,” Ajay Kapur, head of Asia Pacific and global emerging market strategy at Bank of America Merrill Lynch in Hong Kong, said in an interview with Bloomberg TV’s Yvonne Man.

The firm wants to see an increase in earnings before committing to the market, he said. 

Advanced-nation shares are around a third more expensive than developing-country counterparts, based on a comparison of 12-month price-to-earnings ratios for MSCI Inc’s world and emerging-market gauges.

Even so, valuations for some emerging markets are high on an historical basis.

The ratio for India’s Sensex measure is near the strongest in nine years at 18.8, and that’s also 24% above the five-year average.

Indonesia’s exceeds its five-year average by 6.4%.

Foreign funds have pulled a net US$823mil from Indonesian shares this month, set for the biggest outflows since November.

The pace of investment is slowing for some other markets.

India has lured US$581mil in July, compared with US$2.2bil of net purchases over the previous two months, while Malaysian equities attracted just under US$200mil since May, set for the weakest two months this year.

The FTSE Bursa Malaysia KLCI Index fell 0.1% as of 12:40 pm in Kuala Lumpur yesterday. The Philippine Stock Exchange Index declined 0.9% , while the Jakarta Composite Index rose 0.1% and the S&P BSE Sensex Index climbed 0.2%.

Source :
1) www.thestar.com.my (Published on 1 August 2017)
2) Bloomberg

Consumers probably spent enough last quarter to help US growth rebound from a tepid start of the year. The rest of the economy is giving less of a lift, and the pickup is unlikely to last.

Gross domestic product expanded at a 2.5% annualised rate from April to June, according to the median estimate in a Bloomberg survey ahead of figures due on Friday.

While that would be an improvement over the first quarter's 1.4%, some of the upswing owes to the dissipation of temporary factors such as low heating bills, delayed tax refunds and volatility in inventories.

Meanwhile, a gangbusters pace of business investment earlier in 2017 may have eased to a more sustainable rate.

It adds up to a first half where the economy looks much like it did in years past, growth of around 2%, with consumption doing the heavy lifting.

 

The pace is in line with that of the eight-year expansion, even though President Donald Trump's election victory had sent US consumer and business sentiment soaring on hopes that lawmakers would loosen regulation, lower taxes and boost infrastructure spending - moving growth toward Trump's 3% goal.

 

Now reality is setting in with some of the post-election bouyancy retreating amid Washington gridlock on health care and taxes.

 

While a solid job market has helped underpin growth, wage gains remain modest, and key measures such as auto sales and business-equipment orders have been slower than forecast in recent months. Economists see US growth easing back to around the average of this expansion following the second quarter.

 

"It's hard to become too optimistic when you're talking about an economy that's running at about 2%," said Michelle Meyer, head of US economics at Bank of America Corp in New York.

 

"There's very little chance for much accleration. Nonetheless, growth is ongoing. The unemployment rate has gone down, job growth is fairly steady and the consumer should continue to spend."

 

Consumer spending, which accounts for about 70% of GDP, probably accelerated to a 2.9% annualised pace of growth in the second quarter after a 1.1% rate in the prior period that was the weakest in almost four years, based on the median estimate of economists.

Source :
1) Bloomberg
2) www.thestar.com.my (Published on 28 July 2017)
 

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