Twitter
Advertisement

Valuations key risk to Asia markets

Lorainne Tan who believe crude oil will not breach the $100 mark talks on the macro economic developments in the region and the outlook for Indian equities.

Latest News
article-main
FacebookTwitterWhatsappLinkedin

Lorainne Tan is among those who believe crude oil will not breach the $100 mark and the dollar will bottom out somewhere in the middle of 2008. The head of Asia Pacific equity research Standard & Poor’s was in Mumbai recently to present her outlook for the Asia-Pacific equity markets for 2008 at a seminar titled, ‘Will they rise to the challenge or struggle and fall?’ She spoke to N Sundaresha Subramanian on the macro economic developments in the region and the outlook for Indian equities. Excerpts:

Are you comfortable with valuations of Indian stocks?
Valuation was looking peakish, sometime ago. But after the recent correction, we feel the valuations look better. We are market weight on India and our Nifty target for 2008 is 5600.

Which sectors are you overweight on in India?
Energy and Technology. Reliance is from the Energy sector and it is hard to ignore it. Technology stocks have been affected because of the weakening dollar and related global events. We are of the view that the dollar may bottom out sometime in middle of next year. Things would get better for these companies then.

What are the key risks you see for the markets in 2008?
We believe the key risk to Asian markets is the frothier valuations. Other than the H-shares, which have a relatively short history, most Asian markets are currently trading well within their historical ranges and are not excessively expensive given the potential 15-25% earnings-per-share upside despite this year’s strong equity market performance.

At these levels, there is less room to move up, given the relatively higher valuations, so markets are likely to be jittery over potential negative news from stubborn inflation and deterioration in the US and UK economies as real estate weakness permeates.

The Chinese government is also treading warily around concerns over a growing domestic stock market bubble, but the introduction of measures could send prices down sharply. As such, we expect 2008 to be a more difficult year for returns and we would not rule out the risk of a sharp correction. Other key risk is margin compression due to a potential fall in domestic demand.

Can you elaborate on the earnings risk?
Further upside will be dependent on earnings growth being sustained at the current levels. For some industries, we would not expect an equivalent hike of average selling prices to that seen in 2007 to drive earnings growth. Hence, margin expansion based on cost containment on improved efficiency will be key. Nonetheless, the exuberant sentiment being seen in Asian markets currently may move markets up too strongly, resulting in increased downside risk if share prices move ahead of fundamentals.

Which markets are your favourites in the region?
We favour China H-shares, Hong Kong, South Korea, and Thailand. Although we feel that there is excessive speculation in the H-shares and Hong Kong markets, there remains the potential for outperformance over the next six months. We have categorised Japan as underweight, with expectations that the yen will remain relatively weak and that lacklustre domestic consumption will hamper returns to global investors. We are neutral on other markets.

Why do you prefer them?
We have determined our preferred equity markets driven mainly by market expectations of earnings growth against current valuations. We have also taken into consideration the economic environment and potential for unexpected positive news.

As a majority of these are also emerging markets, we also find those with government policies geared towards improving efficiency and resource returns more favourable. Taken into consideration is the potential for currency appreciation to be an added boost to US dollar-denominated returns.

Do you feel a recession in the US is imminent?
We do feel recession in the US is avoidable. We expect two rounds of rate cuts in the US by January. And we belong to the camp that believes the crude won’t breach $100.

Even if Asian interest rates don’t necessarily move in tandem with US interest rates, the rate cuts in the US are likely to be a positive sentiment driver for equity markets. The interest rate cuts do support our expectations for US GDP growth to be stable at 2% in 2008 and should help appease concerns that the US economy is facing a recession.

How will the Asian governments deal with rising currency?
The falling dollar will, however, be an issue to Asian governments with positive surpluses, particularly if the returns on US treasury bonds - when converted to the local currency - actually yield a negative return.

We anticipate that this will spur a growing trend for Asian governments to seek alternative investments, probably through direct investments in global entities in the vein of Singapore’s investment vehicle Temasek Holdings, particularly in the face of a continued high domestic savings rate. As such, M&As are expected to speed up in Asia and should provide additional boosts to the equity markets.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement