HIGH liquidity, stronger currencies and robust domestic growth will keep Asian stock markets buoyant next year notwithstanding anticipated interest rate hikes and political concerns in certain parts of the region. Investor interest will also be shifting from cyclical beta stocks to those with long-term growth potential.
These are some of the significant trends highlighted by J.P. Morgan in its Investment Theme for 2004 report, which said equity markets in the region could be in for a good year ahead, with the KLSE leading the table of top gainers.
Indeed, the firm is unambiguous in its optimism about the markets.
“We believe that Asian economies, with a few exceptions, offer higher sustainable growth than OECD (Organisation for Economic Cooperation and Development) countries,” it said.
“This growth premium, when combined with better capital management, should result in superior equity returns.”
The investment firm noted that Malaysia, on which it has an overweight call, was a beneficiary of high liquidity and new flows of foreign funds which should “spill over” to the stock market.
The KLSE Composite Index (CI) was forecast to rise some 40% to 1,100 points next year with property and banking counters among the main beneficiaries as the wealth effect from the appreciating stock market – estimated by J.P. Morgan to be in the region of US$100bil over the past six months – translate into house sales.
Asset reflation would be a major market theme over the next 1-2 years, it said.
“Property prices have historically tended to lag equity prices by about nine months, and if this were to be repeated, we would now be on the cusp of a new property upswing,” it added.
Elsewhere in the region, the stock markets of Thailand, India and Taiwan were also recommended in the report with an overweight rating, but the underperforming valuations of Australian, Hong Kong and South Korean stocks were less favoured.
Overall, J.P. Morgan said the characteristics of the region's markets next year would be quite different from this year's rallies which had been riding on the sharp increase in economic confidence and risk appetites.
“We believe the cyclical beta phase is now complete. 2004 will be about buying sustainable growth at the right price; target alpha not beta,” it said. Cyclical stocks could fall prey to rising interest rates and stronger Asian currencies.
The firm's currency strategist James Malcolm said the stronger regional currencies would provide confidence to policy-makers to allow their currencies to appreciate. Although the result would be to lower margins for exporters, the capital markets could benefit from a lower level of outward capital movements. And companies with local currency revenue streams would benefit, he said.
J.P. Morgan said that with elections expected in some countries, some pump-priming would occur, boosting further the domestic economies.
There was in fact already ample evidence of “accelerating consumption,” said the investment firm. Furthermore, income and employment growth was being leveraged by cheap and abundant consumer credit.
However, there were likely to be dampeners on equity valuations, it said. One of these was rising interest rates globally, although even that could possibly be mitigated, it added.