“Asian markets look poised for further gains — with China, Japan, and Korea expected to lead the group — after lagging behind the U.S. since the markets hit bottom in 2009.
The MSCI AC Asia Index is up 81% from the March 9, 2009, trough, powered by 200%-plus gains from the region’s smaller markets, including Indonesia, the Philippines, and Thailand, which delivered strong domestic growth in spite of the global malaise. Recent political stability and stronger financial health set the stage for much of that growth, but with valuations climbing to as high as 19 times 2013 profit estimates for the Philippines, some investors are taking a pass — even though the longer-term prospects are promising.
Instead, strategists are looking to the region’s biggest markets to regain their leadership. Fears of a hard landing in China are easing. A steadier global economy offers upside for Korea’s exporters, and new Japanese Prime Minister Shinzo Abe has introduced stimulus measures and a new inflation target — known as Abenomics. All could rejuvenate the market.
The MSCI AC Asia Index’s gains from the March 2009 trail the 115% rebound in the Dow Jones Industrial Average, but since June, Asia’s 22% rise has outpaced the 16% gain in the Dow. Even so, at 10.8 times 2014 earnings, the MSCI AC Asia Index is slightly cheaper than the Dow, which trades at 11.6 times 2014 earnings. Strategists say the Asian markets possess more of the factors needed for further gains.
“We often say that the first 20% of a rally is not driven by fundamentals, but the next 20% is where companies and economies need to deliver,” says Hasan Tevfik, a global equity strategist at Citigroup. “On that basis, you can tick more of the conditions off for Asia than in Europe and even the U.S.”
Earnings growth is one such condition, and Asia, excluding Japan, has a better shot at delivering double-digit growth this year than Europe or the U.S., Tevfik says. That’s not to say the region is about to see a raft of earnings upgrades, but less bad news is likely to be a major driver, especially as the pace of earnings downgrades in China and India decelerates….”
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