Earnings, economic optimism to drive East Asian stocks higher

BENGALURU: East Asia’s stock market bull run is expected to continue for the rest of this year and into next, driven by optimism about economic growth and better company earnings, a Reuters poll showed, bucking concerns that shares remain expensive.

A Reuters survey of equity strategists taken Sept 21-Oct 4 covering 20 indexes shows stock markets are forecast to continue rising worldwide with Asian markets likely to outperform most major global peers.

“To be sure, emerging market equity valuations look somewhat elevated compared with long-term averages, but the same holds true for nearly all stock markets at this point,” Michael Hood, research analyst at JP Morgan Asset Management, said in a note.

Asian stocks have been the biggest gainers globally this year and that momentum is expected to continue though the rally is highly dependent on economic growth, the performance of US stocks, as well as the pace of the Federal Reserve’s policy tightening.

The US central bank in September announced a plan to reduce its over US$4 trillion balance sheet from October and signalled another interest rate hike in December, followed by three more rate increases in 2018.

Higher rates in the US are generally bad news for Asian stock markets as higher yields on US assets tend to result in capital outflows from those countries.

China’s Shanghai Composite index, which has surged nearly 8% so far this year on strong economic growth. It is now forecast to add about 1.5% by end-2017 bringing the full-year increase to 9.6% and rise more than 7% for the 2018 full-year.

However, a growing debt mountain has raised concerns over the health of the world’s second-largest economy and prompted Standard & Poor’s to downgrade China’s long-term sovereign credit rating last month.

Chinese stocks will also be driven by key political and economic policies to be announced at the once-every-five-years China’s Communist Party meeting, starting from Oct 18.

Respondents to the latest Reuters poll were mostly optimistic about Asian stocks in 2018, supported by decent corporate profits and a buoyant global economic outlook.

But rising protectionist threats on trade and simmering political tensions remain important risks, even though they have done little to disrupt stock markets so far.

While South Korea’s Kospi index hit near two-week lows last week as tensions flared in the Korean peninsula, the index is still up over 18% so far this year and is forecast to gain a further 6% to 2,540 by year-end. It is then predicted to rise to 2,650 by the end of next year.

The latest expectations for end-2018 are slightly weaker than predictions made just three months ago and much now depends on how US President Donald Trump responds to North Korea.

India’s stock market, one of the best performers this year, is forecast to rise further through to the end of 2018 but by less than predicted just three months ago.

After gaining more than 13% so far this year, Taiwan’s benchmark stock index is forecast to hold at around the current level by the end of this year but decline more than 8 percent by end-2018. - Reuters