A short note today rounding up useful gems from the research front line – with a focus on Asian and European equity markets. The bottom line is that they all echo my own focus – slowly take profits on the US and reinvest in Asia, Emerging Markets and the Eurozone.
The stand out ‘blue paper’ is from analysts at Morgan Stanley who have just released a weighty tome that looks at what they think could be the really important 10 year theme for global investors – Asia’s evolving capital markets. They see the continents pension funds, mutual funds, insurance, and equity and debt capital markets as primed for accelerating growth, driven by rapidly rising household wealth, demographic change, structural reform, technological change, and the development of institutional investment capacity.
“We identify four overarching benefits for countries and companies tapping into Asia’s financial acceleration: 1) higher productivity growth via improved financial access and more efficient capital structures, 2) lower cost and greater availability of equity funding, 3) improving depth and liquidity in FX and rates markets, and 4) greater access to offshore corporate bond markets at lower credit risk premia”
The really incendiary stuff comes later in the report, with predictions for 2027.
- “Our modelling projects that Asia’s total market capitalisation will double to US$56trn by 2027. Asia will overtake North America (US & Canada) as the largest equity market region as it generates over half of the world’s growth in market cap
- We project pan-Asia mutual fund assets to grow to US$13.2trn (CAGR of 9%) and for the top five insurance markets in the region to grow to US$20trn (CAGR of 12%) over the same period.
- We identify 16 names that screen as having strong existing international and Asian footprints, and where Morgan Stanley analysts are positive on the impact of this theme on the stock, including AIA, Bank of China, Blackrock, Carlyle, Citic Securities, Citigroup, Credit Suisse, DBS Group, Hong Kong Exchange, HSBC, JP Morgan, Macquarie, Manulife, Prudential, Sumitomo Mitsui, and UBS.”
So, which countries will come out on top in this new interconnected Asian financial ecosystem? Morgan Stanley has its very own Financial Acceleration Scorecard, with Singapore top with 31 points, Hong Kong with 30 points and Australia with 28 points. The Bottom three? China – with 13 points – Indonesia (12 points) and Pakistan (12).
What next for Asian stocks in 2018?
If this all seems a bit too far-sighted, let’s refocus now on the current state of Asian equity markets. EM stocks had a good week last week, with China (Shenzhen) the best emerging market performer at +3.5%. What kind of stocks are doing well in Asian markets at the moment? According to Asian analysts at SocGen there is real …
“performance dispersion at the sector and stock level with Leisure Goods (consumer goods) turning in +8.1% last week but Support Services (Industrials) and Tobacco (Consumer Goods) losing -3.9%. Estimate revisions (and dispersion) remain strong with Japan and Hong Kong the key markets to watch. We saw positive revisions push Singapore, Malaysia and Thailand up the ranks. Korea and India remain at the bottom due to Technology and Financials respectively. In sector terms, Asian Financials continue to see strong positive revisions (specifically in Singapore, H.K. and Malaysia), followed by Oil & Gas (Thailand). Meanwhile Tech (Korea) and Telecoms remain at the bottom of the board with the most negative revisions.”
Earnings for EM corporates upgraded by UBS
Analysts at UBS also sound positive about Asia and emerging markets more generally – yesterday they upgraded their EPS growth estimates, with a target increase of 19% in 2018 and 10% in 2019. Their latest GEMS data is …
“well ahead of consensus (+14%) and our top-down forecast (+15%) and now shows little slowdown from stellar EPS growth of 22% in 2017. EM Banks EPS growth is forecast to be 19%, up from just 6.1% in 2017. This year’s growth should be driven by Industrials and Cons. Disc. (both Overweights) which take over from last year’s key drivers – global cyclicals and Tech. China should lead the earnings parade in 2018 (+21%), with Brazil, Russia, India and Korea all in a 16-21% growth range.”
Crucially the UBS analysts seem an emerging macro-micro divide emerging in China.
“ Over 80% of the 2018 EPS forecast upgrade is due to China, signalling a macro-micro divide as GDP growth slows. By sector, Real Estate has seen the biggest EPS revisions, with Banks contributing the most to the aggregate upgrade; IT forecasts are flat. By stock, four Chinese banks and Tencent account for >30% of the revisions; Samsung Elec., BHP Billiton, Tata Motors, SBI and PNB have been the main drags.”
Europe set to close the gap with US – says ETF Securities
Last but by no means least, how will European equities fare as Asia and EM stocks power ahead? Analysts at ETF Securities reckon that Eurozone equities are cheap, compared to the US, and that the performance gap will narrow by the fourth quarter in 2018. Their analysts suggest that looking ahead “ the positive trajectory of Eurozone Purchasing Manager’s Index (PMIs), even taking into consideration the recent pullback in February, indicate European profit margins are set to expand further.”
“Projections for 2018 Earnings Per Share (EPS) growth continue to rise for both economies. However, the pace is slowing in the US in sharp contrast to Europe where estimates are set to accelerate towards year-end. Energy and materials sector are contributing the most to the pace of revisions going forward. “
Europe trading at a discount to US
“Eurozone equities have been trading at a discount to US equities since 2011. Cyclically Adjusted Price to Earnings (CAPE) ratios at 22x earnings in Europe are currently trading at a 13 percent discount to the US at 25x, in spite of the recent sell off (Source: Bloomberg). European companies have historically paid out a greater share of their earnings to shareholders in dividends than US companies. Higher dividend yields in Europe at 3.3% compared to US equities at 1.9% enhance the case for investing in European stocks (Source: Bloomberg). In light of the above discussion, we expect Europe to bridge the gap with US equities over the course of the year supported by higher earnings projections, an improving macro backdrop and lower valuations. While political headwinds linger, evident from the success of the anti-establishment Five Star Movement in the recent Italian elections, we believe it is unlikely to derail Europe’s economic expansion. “
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