Asian equities are likely to outperform other global markets in the coming months, fuelled by stronger earnings’ growth, according to Andrew Pease, Russell’s senior investment strategist Asia-Pacific and author of the latest Russell Asia Market Commentary.
Pease said that although Asia’s (ex-Japan) price-to-earnings (PE) ratio, relative to other markets, is still high by historic standards, it can be justified by the region’s stronger medium-term growth prospects.
“In terms of asset class valuation, we see world equities as broadly fairly valued but we believe Asian equities have more profit potential,” Pease said. “At 12.5 times, Asia’s forward PE ratio is spot on the 20-year average.”
Pease said Hong Kong is a preferred equity market in Asia, given it is attractively priced, relative to the rest of the region. Hong Kong, like Singapore, is also expected to benefit from a recovery in export orders.
Korean equity valuations continue to improve, however, Pease cautioned that Indonesia has simply become too overvalued after the local market rallied 168% in the past 12 months. That compares compared to the 90% gain for the region on the Russell Index.
Longer term, Asia still remains one of the most attractive investment plays. “Favourable fundamentals mean we are likely to see a continued growth gap between the region and developed economies,” said Pease.
While the global outlook for investments in 2010 remains “complicated” and “challenging”, amid uncertainty over the economic recovery, there are selective opportunities.
“Corporate credit is still relatively attractive, although not the value opportunity of six months ago, while global government bonds are expensive but the absence of inflation pressures means a significant sell-off may not happen until later in the year,” according to Pease.
US: U, V or W Recovery?
The Russell Asia Market Commentary outlines that the recovery in the US economy will be gradual and takes the shape of a deep ‘U’ with Russell forecasting moderate gross domestic product (GDP) growth of 3% in 2010. This pace of growth will probably only stabilise the unemployment rate near 10%.
An impediment to a stronger recovery is the fragile US banking system as many banks now face escalating loan losses arising from the severity of the recession -particularly in loans for commercial real estate.
Asia Shines, Despite Sluggish Global Recovery
The Russell Asia Market Commentary explains that, while the global financial crisis demonstrated that not all of Asia’s economies are export dependant, “we are now cautiously optimistic that Asia is shifting towards a more domestically driven growth model as higher incomes generate more consumption and lower saving.”
In addition to the referenced Asian markets, the report adds that China still looks relatively neutral on valuation grounds. The forward PE ratio is low relative to the region and at 12.5 times is below the 10-year average of 13.5 times. Valuation indicators for India are mixed. The forward PE ratio at 16 times is well above the 10-year average of 13.7 times. India’s accelerating inflation rate is likely to bring the Reserve Bank of India into action before long, suggesting that some caution by investors is warranted.
Taiwan remains a difficult market to judge as the forward PE has fallen dramatically over the past year from 28 times last February to 13.8 times currently and it is now below the 10-year average of 14.7 times.
Asia’s Growth Advantage Over Developed Economies
The Russell Asia Market Commentary says that favourable demographics, strong household balance sheets and healthy government finances argue for a sustained growth gap between Asia and developed economies.
Asia’s challenges over the next years are likely to involve the management of economic success with China at the forefront as it manages the tricky task of withdrawing monetary and fiscal stimulus without sending the economy into a deep downturn.
“Asia is a region prone to booms and busts and there is a temptation for regional governments to keep exchange rates undervalued and allow credit growth to expand for too long,” Pease concluded.
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