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Do Asian Equity markets look inexpensive?

Asian equities look attractive based on their fundamentals and the prospect of accelerating earnings growth.
18 February 2020
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    Do Asian Equity markets look inexpensive?

    After barely making it into positive territory in 2019, estimates [of earnings growth] for 2020 were in the range 8-14 per cent - HSBC Global Markets Research had a figure of 9 per cent.

    A quick look at the relative forward price earnings ratio for the MSCI Asia Pacific Index compared to the S&P 500 shows that Asian equity markets haven’t been so ‘cheap’ for decades; if ever. 2019 proved a headline year for equity returns with the S&P 500 returning 31 per cent (total return in USD), over 10 per cent above the 19.92 per cent level of the MSCI Asia Pacific Index(1).

    Fig. 1: MSCI Asia Pacific vs S&P 500 – 12M Forward P/E
    (%)

    MSCI Asia Pacific vs S&P 500 – 12M Forward P/E figure 1

    Source: Bloomberg, as of 14 February 2020.

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    A key driver of returns in 2019 was the upward change in valuation with earnings growth at 1 per cent for MSCI Asia ex Japan. All this was set against the seemingly uncertain environment of the ongoing trade dispute between the US and China, slowing growth in Europe and a number of additional macro-economic issues. Yet entering 2020, it would be feasible to present a number of reasons to be constructive on the prospects for, more broadly, Asian growth; and, more specifically, a number of stocks and sectors of the Asian markets.

    Yet with the first quarter hardly halfway through, commentators and charts appear keen to dismiss this early optimism given renewed middle east tensions and, more pertinently, the uncertain coming days and weeks as countries and the global economy continue to understand the impact of the coronavirus (Covid-19).

    Entering 2020, one of the bright spots for equity markets, and indeed Asian equity markets, was the potential for earnings growth to drive returns. After barely making it into positive territory in 2019, estimates for 2020 were in the range 8-14 per cent(2) - HSBC Global Markets Research had a figure of 9 per cent(3).

    Fig. 2: A mid-single digit EPS scenario in 2020

    A mid-single digit EPS scenario in 2020 figure 2

    Source: Bloomberg, as of December 2019.

    This chart tracks the live calendar year earnings growth expectations and shows the growth rate between the latest calendar year-end EPS estimate and the previous year-end trailing EPS.

    Note: for 2020 growth rates we proxy year-end 2019 trailing earnings growth with the latest 2019 expectations.

    Indeed, there were signs in late 2019 that EPS growth in EM and Asia was beginning to accelerate, after something of a slow decline from 2018. Clearly, confidence has been dented – as noted above, but over the medium term could a case still be made that this current level offers an entry point for Asia?

    Fig. 3: MSCI Asia Pacific – Quarterly EPS Forecast
    %

    MSCI Asia Pacific – Quarterly EPS Forecast figure 3

    Source: Bloomberg, as of 14 February 2020.

    Perhaps to temper the near term scenario where equity markets have remained fairly resilient, the coronavirus will clearly have an impact on Chinese GDP growth, with knock-on effects to both domestic A-share companies and also markets such as Taiwan, Hong Kong, Singapore in Asia. With factories only just restarting production after an extended lunar new year holiday and no clear data to measure the effect on the consumer, the magnitude of this is still unclear.

    However, broader themes such as the digital economy, rise of 5G and the consumption upgrade in China are not measures in hours and days. Those stocks which were well positioned to benefit at the start of 2020 may still benefit over 2020 and beyond – assuming a moderate slowdown to manufacturing and consumer spending in the first half. The Chinese government has already signaled its willingness to offer further policy support to help keep the economy on track, it eased 50bps on the reserve ratio requirement in January which freed up USD115 billion to be redeployed in the economy(2).

    Timing entry points to markets can prove difficult at the best times, this is further complicated when clarity on the resolution of the ‘coronavirus’ is causing a high degree of uncertainty around macro-economic data, manufacturing activity and company level impacts. The great gift of hindsight will inform many of us if this recent dislocation between Asian equity and the US, despite these risks, may be an opportunity to position for the medium term.

    (1) Source: Bloomberg, as of February 2020
    (2) Source: Bloomberg, as of February 2020

    (3) Source: HSBC Global Markets Research, as of February 2020

    The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

    The views expressed herein do not constitute investment advice, research or trade recommendation. Such views are the personal views of the author only and do not necessarily represent the views of HSBC Global Asset Management (Hong Kong) Limited.


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