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HONG KONG: Asia’s equity rally has been largely bulletproof this year with the regional benchmark up about 10 percent in less than four months.
What might be more concerning is how calm the market has been -- volatility on the MSCI Asia Pacific Index is now at a level last seen in October, just before the massive risk asset sell-off that sent stocks plunging 14 percent in less than three months.
For some investors, it’s not a question of if the rally will come to an end, but rather when, and that could be as soon as the second quarter.
“For the second quarter, we believe equity valuations are at risk,” said Unigestion Holding SA in a second-quarter macro investment report to clients. Higher valuations and expectations of disappointing earnings outlook amid concerns surrounding economic growth suggests that market have been complacent, the note added.
What concerns Unigestion is that while in the past three periods of slowdown or recession, the trigger for a recovery was a sharp improvement in economic conditions, that’s not the case this time: growth is decent yet decelerating.
Rather, the trigger was a combination of discount valuations coupled with a “significant change in tone” by developed market central banks, especially the Federal Reserve, the investment manager said. And both of those elements are at risk, it said.
Increased valuations
Indeed, forward valuations for both global and Asia stocks have surged since the end of the year.
The blended forward 12-month price-to-earnings ratio for both the MSCI All-Country World Index and the MSCI Asia Pacific Index have jumped 20 percent and 18 percent respectively from the December low. Both indexes have rallied more than 10 percent each this year.
Meanwhile, analysts’ earnings growth expectations have been steadily revised downwards so far this year for the MSCI World Index, down to 2 percent at the end of March from 5 percent at the start of the year, according to Unigestion.
Early earnings
Very early earnings results from Asia may also be starting to confirm this view.
Fast Retailing Co., operator of the Uniqlo clothing brand and shops, cut its annual profit forecast for the first time in three years after the market close on Thursday. Still, the shares rose.
In the U.S., Bloomberg Intelligence analysts Gina Martin Adams and Michael Casper are a bit more optimistic for the fortunes of S&P 500 stocks, as rock-bottom estimates may give companies a better chance of surprising to the upside.
“S&P 500 companies that confirm analyst views that margin expansion will support second-half profit recovery may fare best,” they said in a report this week.
“With sentiment highly skeptical, we think price reactions this earnings season could be as extreme as they were in response to fourth-quarter reports.”
Stock-market summary
• MSCI Asia Pacific Index down 0.1%
• Japan’s Topix index down 0.1%; Nikkei 225 up 0.6%
• Kong’s Hang Seng Index down 0.3%; Hang Seng China Enterprises down 0.2%; Shanghai Composite down 0.2 percent; CSI 300 down 0.4 percent
• Taiwan’s Taiex index little changed
• South Korea’s Kospi index up 0.2%; Kospi 200 up 0.3%
• Australia’s S&P/ASX 200 up 0.7%; New Zealand’s S&P/NZX 50 little changed
• India’s SGX Nifty 50 futures down 0.3%
• Singapore’s Straits Times Index down 0.1%; Malaysia’s KLCI up 0.1%; Philippine Stock Exchange Index down 0.2%; Jakarta Composite up 0.1%; Thailand’s SET down 0.2%; Vietnam’s VN Index down 0.3%
• S&P 500 e-mini futures up 0.1% after index closed little changed in last session - Bloomberg
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