Asian stocks and corporate bonds were hammered in 2018 by trade tensions, U.S. interest-rate increases and Beijing’s deleveraging policies. After 12 months of turmoil, those assets look cut-price on some measures.
Compared with forecast earnings, regional share valuations are at their lowest levels in about five years, according to a FactSet index covering thousands of Asia-Pacific stocks. They trade at about 12 times expected earnings for the next 12 months, while FactSet shows U.S. stocks trade at about 15.5 times, roughly in line with their 10-year average.
Set against free cash flow, the stocks look even better value. On that basis, Asian equities are at their cheapest levels in more than a decade, below even lows hit at the depths of the financial crisis.
Moreover, with China attempting to arrest its economic downturn, Federal Reserve policy makers signaling they are willing to be patient with future interest-rate increases and signs of progress emerging in the trade-related impasse between Washington and Beijing, some analysts and investors are increasingly optimistic about the region.
The extreme valuations could be due to analysts delaying cuts to estimates for earnings and cash flow, but banks have had plenty of time over the past year to downgrade their forecasts.
Asian companies’ high-yield dollar bonds are now priced near their cheapest levels since 2011, at 8% below face value on average, according to ICE Bank of America Merrill Lynch indexes. Regional corporate bonds with investment-grade ratings are also trading below par, despite a modest rebound in the past month.
What It Means
With the Fed likely to slow its interest-rate increases this year, Asian credit now looks more attractively valued than U.S. or European corporate bonds, according to Chris Siniakov, managing director of Australia fixed income at Franklin Templeton Investments.
HSBC said it expects an 18% rise in the MSCI AC Asia ex Japan Index this year, and advocates that clients take a larger position in Chinese, Thai, Singaporean and Korean shares than a broad index investment would suggest.
In a note to clients, Herald van der Linde, head of Asia-Pacific equity strategy at HSBC, said Asian companies are still delivering high-quality earnings growth. “Margins are expanding in China, and indeed in large parts of the rest of the region,” he said. Consensus estimates are for Asian earnings per share to rise by 8% this year.
Not everyone is so optimistic. Oliver Jones, markets economist at Capital Economics, said he expects emerging-market stocks in Asia to underperform the rest of the developing world this year, suggesting that a continued slowdown in China will affect Asian stocks the most.
“Valuations have little relationship with short-term performance in any case,” Mr. Jones said.
Source: The Wall Street Journal
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