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Business News/ Opinion / Online-views/  Bullish on China, not on India
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Bullish on China, not on India

Bullish on China, not on India

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There are other tentative signs of optimism returning to Asia, even as the region throws up some terrible economic data. For 2009, several brokerages have said China is a “must-buy", Credit Suisse says a “deep and long recession appears to be priced in" in Asian equities and Morgan Stanley expects a fightback by emerging market equities, with emerging Asia outperforming other regions. The brokerages give several reasons for their optimism. UBS’ outlook for 2009 says that “at current levels, Asian equities are attractively priced". Morgan Stanley points out that Asia could have seen a market trough on 27 October primarily because valuations have become much lower (in terms of trailing price-earnings multiple) than in previous recessions. On a price-to-book basis, valuations for Asia ex-Japan are back to levels last seen during the Asian crisis.

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But surely this optimism, especially about China, needs to be taken with large doses of salt. While the focus has been on the fall in Chinese exports in November, it’s worth recalling that imports fell much more, a sign of the demand destruction going on in China, though part of the fall would be linked to the fall in exports. But the Morgan Stanley note makes the following points after studying the last three bear markets in emerging market equities: “Market prices peak before the EPS (earnings per share) recession begins (first year-on-year decline) and trough before the EPS recession ends. On one occasion (September 2001), the market trough came before the EPS recession actually began." In other words, stocks will rise before the economy does. The caveat, of course, is simply that past recessions may be no guide to the current one.

The bad news is that India continues to be rated an underperformer and much of the bullish case rests on China’s ability to deliver a strong fiscal stimulus. Indeed, despite Morgan Stanley’s rosy outlook for Asia, its report on Indian strategy is titled, 2009: Road to Nowhere. That’s because of the multiple headwinds India faces. As the Morgan Stanley report points out, “To turn the tide, India needs pump priming without the use of public debt, more liquidity on the balance sheet of banks, better relative valuations, earnings downgrades, global calm leading to a better BoP (balance of payments), a good election result to ensure smooth policy action in the coming years and quick corporate restructuring focused on delevering operations to limit the earnings damage."

Write to us at marktomarket@livemint.com

Graphics by Paras Jain / Mint

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Published: 14 Dec 2008, 11:35 PM IST
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