Buyers get picky amid weaker earnings estimates in Asia
SINGAPORE: One of the pillars supporting a rally in developingnation 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 exJapan Index was 7.5 per cent higher since June last year, that reversed to a one per cent decline if South Korean equities were taken out, said the Swiss-based bank in a July 19 note.
One-year forward earnings per share estimates for Philippine and Malaysian companies in the gauge were down 26 and 5.9 per cent, respectively, in US 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.
South Korean and Philippine banks could still see some gains, while Indian and Indonesian infrastructure stocks remained attractive, said Crabb.
The main driver for downgrades in Asia ex-Japan was “expensive” Indian and Indonesian equities, Credit Suisse strategists Sakthi Siva and Kin Nang Chik wrote in
Foreign funds pulled from Indonesian shares
It was underweight on those markets, along with Malaysia and the Philippines.
“India just doesn’t have earnings power at all,” said Ajay Kapur, head of Asia Pacific and global emerging market strategy at Bank of America Merrill Lynch in Hong Kong.
The ratio for India’s Sensex measure is near the strongest in nine years at 18.8, and that’s also 24 per cent above the five-year average. Indonesia’s exceeds its five-year average by 6.4 per cent.
Foreign funds have pulled a net US$823 million (RM3.52 billion) from Indonesian shares this month, set for the biggest outflows since November.
The pace of investment is slowing for some other markets. India lured US$581 million last month, compared with US$2.2 billion of net purchases over the previous two months, while Malaysian equities attracted just under US$200 million since May, set for the weakest two months this year.
A lack of earnings growth at a time when the world’s big central banks are looking to unwind stimulus may make it harder for the MSCI Asia-ex Japan Index to add to its 27 per cent gain this year.
“Stretched valuations for India, Indonesia and Malaysia may invite more caution,” said Jingyi Pan, a market strategist at IG Asia Pte Ltd, here. “Investors are likely to be more guarded with regards to these markets unless earnings expectations do match up.” Bloomberg