Investors uncertain about Asian equity rally

While Asian shares, riding on the global rally, have jumped the highest in a decade, warnings on complacency come laced with hopes for further highs.

“The global economy is in pretty good shape and global equity markets are scaling to record highs on rising optimism, but one must not be over complacent. Rich valuations raise the likelihood of a market correction, should there be policy missteps or a protracted period of policy uncertainty which can dampen economic growth and confidence,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.

“The MSCI Asia is trading at 14.6 times price earnings ratio, with expected earnings growth of 25% for 2017,’’ said Thomas Yong, CEO, Fortress Capital.

China’s overseas shipments rose from a year earlier, the latest sign that Asian trade is holding up, said Bloomberg. Exports increased 8.1% in September, while imports jumped 18.7%, exceeding estimates and recording the fastest growth since March. Trade has also improved elsewhere in Asia. Exports surged to records last month in South Korea and Taiwan; August data strengthened in Thailand, Malaysia and Singapore, noted Bloomberg.

But the stockmarket action is mostly in Japan, South Korea and Hong Kong. “As the macro outlook is positive and developed markets are already on a bullish trend, laggard Asian markets are likely to appear on the radar for the next opportunity,’’ said Danny Wong, CEO, Areca Capital.

Prospects for KL market: “From the recent run, it seems we have had our run for the year. For the main index to rise, we need earnings to catch up. “We are still behind our record of 1,892.65 points recorded in July, 2014,’’ said Wong.

The International Monetary Fund (IMF), which issued another warning on China’s debt, has raised its outlook for the country’s growth this year and next. It is now assuming a slower rebalancing of the Chinese economy toward services and consumption, as well as a higher debt trajectory and diminished fiscal space to respond to a crisis, said Bloomberg, adding that this implies a higher risk of a ‘sharp’ slowdown in growth.

The IMF, which sees Japan most at risk of a recession, puts the probability of a recession in the country, within the next year at just under 40%. Still, the risk of recession in Japan, for which confidence among big manufacturers had improved to the highest level in a decade, had dropped from the level in April.

“The IMF has recently revised upwards the economic growth of China and Japan, citing better global economic growth.

“Despite the warnings, investor sentiment is likely to remain cautiously optimistic, as emphasis is usually placed on the growth outlook,’’ said Yong.

The IMF warnings may impact sentiment Asian markets.

“But equity investment is always rewarded with returns commensurate with uncertainties and risks,’’ said Wong.

“Malaysia needs to guard against risks and volatility associated with policy uncertainties of advanced economies and the risk of a sharp slowdown in China.

“It will likely be impacted by the close integration of trade with China and Japan, mostly via trade channels, if there are severe dislocations in these two economies,’’ said Lee.

In the first eight months of 2017, Malaysia’s export share to China and Japan stood at 13.2% and 8.2% respectively. ‘’What is likely to buffer Malaysia against any economic slowdown in China and Japan, will be its domestic demand that has been supporting the local economy.

“This will be underpinned by the ongoing and new implementation of public transportation projects as well as infrastructure spending on rail, ports and highways,’’ said Lee.

Equity strategists are seeing their best guesses “left for dead” as the S&P 500 Index piles on gain after gain. “The rally has come as a surprise to many. From stretched valuations to elevated policy uncertainty, things that strategists pointed to 10 months ago as reasons for a subdued market, have stayed largely in place or gotten worse.

“Yet stocks keep rising as investors brush aside threats from North Korea to politics to Federal Reserve tightening,’’ said Bloomberg. Missing the rally has been painful, with more than US$3 trillion added to US share prices this year. Strategists now have been forced to play catchup; at least two have lifted their year-end target by at least 200 points.

Columnist Yap Leng Kuen considers successful investing to be an art, besides being a science.