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MooFassa
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Posting #1: Sat Jul 12th, 2008 02:56 |
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Analysis: Asia stocks getting cheaper but still too risky
Published: 2008/07/11
S&P's likes mid-cap stocks in Malaysia’s energy sector, which offer stable profit margins, ensuring dividend payments will be sustained even during tough periods
HONG KONG: Asian shares have become the cheapest in two years by some measures after getting a drubbing in the first-half, but don’t expect bargains to coax investors back to the market until stagflation fears cool.
The powerful fundamental forces that caused the benchmark MSCI pan-Asia index to fall 14 per cent in the first half and turned fast-growing Vietnam and China into two of the worst-performing global markets are still in play.
But valuations will likely become more of a support to markets once the earnings outlook for 2008 and 2009 become more clear, analysts said.
“The valuation of the Asian market is now bottoming,” said Cheuk Wan Fan, head of research, Asia Pacific, for Credit Suisse Private Bank in Hong Kong.
Shares in the MSCI Asia ex-Japan index are trading at about 11.6 times forecast earnings 12 months from now. That is 15 per cent below a 10-year average and only slightly above the 11 times valuation reached at the peak of Asia’s financial crisis in the late 1990s.
“If we try to gauge the potential downside risk of the market and compare it with the previous trough at 11 times, a further correction in Asian equities to reach the previous trough would imply single-digit downside,” said Fan.
The first-half’s losses in MSCI’s pan-Asia index were the biggest since 1992. The Dow Jones industrial average also fell about 14 per cent while Europe’s FTSEurofirst 300 index tumbled 20 per cent in the first half.
However, Fan is cautious about the near-term direction in Asia given the uncertain outlook on global demand and inflation. A 42 per cent jump in oil prices so far this year has already hurt profit margins for companies in many sectors.
For now, she recommends buying some Japanese stocks, including Sumitomo Mitsui Financial Group and Mitsui & Co Ltd, since it is one of the few countries in the region that can actually benefit from some inflation after about a decade of deflation.
Fan also sees value in Australia’s telephone company Telstra Corp Ltd and Singapore real estate company Capitamall Trust.
“While valuations are at a crisis level, systemic frailty that has emerged out of the US have poisoned investor sentiment too much in the first half for there to a big turnaround in the market in the second half,” said Benjamin Collett, head of hedge fund sales at Daiwa Securities SMBC in Hong Kong.
Emerging Asian stocks may be cheaper than they were six months ago because of a sharp selloff but other markets probably have more value in the near term because of Asia’s sensitivity to high oil prices and its heavy dependence on the export sector.
On a global basis, equities began the year trading on average valuations that were the lowest in nearly two decades at 15.9 times trailing earnings, according to Citigroup.
After the first half, valuations have dropped to 14.3 times, in line with averages in the 1980s.
HOW LOW CAN THEY GO?
Markus Rosgen, Citi’s Asia-Pacific strategist, uses price-to-book value to measure valuation in the region because of the historical unreliability of earnings, dividends and cash flows data in measuring relative value.
Rosgen said on this basis Asia ex-Japan stocks are still expensive at 2.1 times book value relative to their 10-year and 30-year averages of 1.8 times and also relative to recessions when price-to-book valuations dropped to 1.0 to 1.3 times.
That suggests quite a bit more pain to come. Indeed, Rosgen expects earnings this year to be negative in the region, compared with consensus forecasts for growth of 6.7 percent.
Lorraine Tan, director of equity research with Standard & Poor’s in Singapore, sees the potential for price-to-book valuations to fall to 1.5 times this year, but she does not expect them to stay there long, since market players would likely pounce on the opportunity.
“You could be in a situation where the outlook starts to improve in the second half but if share prices are lagging and profit declines turn out to be as bad as some people think, you could see 1.5,” she said.
Tan said that for all the risks of slower export growth in China, some Hong Kong-listed stocks in the world’s fastest growing economy look attractive at current valuations, such as energy firms CNOOC Ltd and PetroChina.
She also likes mid-cap stocks in Malaysia’s energy sector, which offer stable profit margins, ensuring dividend payments will be sustained even during tough periods.
Australia’s financial sector, after about eight months of battering due to credit-related stress, is also beginning to turn some heads, though it is still a risky bet.
The country’s top investment bank Macquarie Group is trading at a single-digit multiples, having seen its price-to-earnings and price-to-book ratios halved in the last year.
“For people who are prepared to take a long term view, banks are starting to look interesting,” said Robert Hook, portfolio manager at SG Hiscock & Co in Sydney. “They could suffer some more in the next couple of months but they are starting to look attractive.”
Collett from Daiwa Securities SMBC also sees bargains forming but for now sticks with lower-risk investments in companies such as China Mobile, China Construction Bank and Industrial and Commercial Bank of China.
Until inflation can be contained and the global growth picture improves, safety and stability seem to be the watchwords of investors. That is, until the bargains become irresistible. - Reuters
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