Hong Kong: The medium-term risks of persistently soft US consumption and the eventual withdrawal of crisis policies will probably end a six-month honeymoon in Asian stock markets, when such risks were largely ignored.
Robust, stimulus-driven economic recovery in Asia and investors’ short-term focus helped sustain the rally. Now, however, to avoid a correction markets will require proof that the private sector demand can take over and ensure lasting growth.
In fact, the premium that stocks in Asia-Pacific outside Japan have enjoyed over the S&P 500 has already begun narrowing from its July peak in the absence of evidence that Western consumption, so crucial for Asian exporters, is returning. The news actually reflects the opposite, making the market.
US consumer credit fell by a record $21.6 billion in July, unemployment hit a 26-year high of 9.7% last month and 46 states saw economic activity shrink in the three months to July, according to the Philadelphia Federal Reserve’s gauge.
“The difference in this cycle from an Asian perspective is the US consumer is going to be subdued for many years to come,” said Nick Scott, chief investment officer for Asian equities at BlackRock in Hong Kong.
Banks in particular with a large deposit base will likely do well in an environment of higher interest rates because customers will benefit from more yield, Scott said.
The MSCI index of Asia Pacific stocks outside Japan is trading at a multiple based on 12-month forward earnings estimates of 14.8 times, down from highs of 15.5 times after Lehman Brothers Holdings Inc.’s collapse, according to Reuters.
The last time that valuations were north of 15 times, the average GDP-weighted policy rate in emerging Asia was around 6.5%. The average is now 4%, according to JPMorgan. That means valuations are still vulnerable to downward pressure as central banks begin to normalize monetary policy. Swap markets now factor in central bank tightening in Australia, India and South Korea by the end of March. By then, the impact of inventory restocking will have largely run its course.