Bullish calls mount as Asian stocks surge in new year
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The rally since late October has sent the MSCI Asia-Pacific index up nearly 23%, outperforming the US benchmark by a wide margin since 1993 while beating its European counterpart. The predominant driver was the re-opening of China, with a weakening dollar providing an additional boost as investors seek recession-proof markets.
On course for the best start to the year since 2012, the MSCI Asia gauge climbed 7.2% in January. The rally still has many months to go, according to a survey of fund managers by Bank of America Corp. and the United States.
With recession-related concerns in the developed world, “the prospect of Chinese authorities supporting their domestic growth has made Chinese and Asian assets more attractive to global investors,” said Gary Dugan, managing director of the Global CIO Office, an asset manager. and financial consulting firm. “We have increased our weightings in Asia and see this could pay off for several months.”
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China has received the most attention in the Asian rally, with the MSCI China index jumping more than 50% since late October. But optimism is also overflowing. Benchmarks in the Philippines and Vietnam entered bull markets this month, while Taiwan is approaching the cap.
BofA’s Asia Fund Manager Survey found that 95% of investors expect equities in Asia-Pacific ex-Japan to rise over the next 12 months, and around half expect double-digit earnings. Most fund managers are “unabashedly bullish on China”, he added.
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The fluxes reflect the change in seismic view. Foreigners bought $16.5 billion worth of mainland Chinese stocks in January alone, expected to be the largest monthly inflow on record. They also paid $3.3 billion to South Korea and $4.5 billion to Taiwan.
Even with the rally, Asia’s valuations don’t look stretched. The region’s benchmark MSCI index is trading at 12.9 times forward earnings estimates, in line with its five-year median.
Certainly, an economic recession in the developed world could undermine some of the newfound optimism towards Asia, especially for export-dependent markets like Korea. And as China’s economy picks up again, there is a risk that inflationary pressures will build, which could keep central banks hawkish for longer.
Meanwhile, earnings paint a promising picture. Year-over-year forward earnings estimates for the benchmark MSCI Asia have risen around 6% since the end of October, compared to declines of at least 1% each for the gauges representing the US and Europe , according to data from Bloomberg.
“No economy in Asia is at risk of recession,” Bernstein strategists led by Sarah McCarthy wrote earlier this month. “On a 12-month forward-looking basis, we expect Asian equities to end 2023 on a positive note.”
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