The outlook for Asian equities
The table below shows the relative performance of Asian stock markets, and prospective earnings growth and valuation.
The big loser, of course, is the China Class A stock market, down 27 per cent in the year to March 31.
Alpha has repeatedly warned the China stock market was a bubble waiting to burst. Even after the heavy falls, Alpha still believes the China stock market is overvalued and too risky to invest in directly.
Vaulations are looking more attractive, especially in markets Alpha POWER Shares – Asia Lions, is invested in. For example, the prospective PE multiple for Korea in 2008 is 11.3 times. Taiwan is 13.8 times, Malaysia is 14.1 times and Hong Kong is 16.9 times.
Much depends on what happens in the United States. Alpha’s view is the US economy still has further to weaken and that Asian equities will be dragged lower, although relatively less than the major western equity markets.
Alpha believes the capital protection overlay in Alpha POWER Shares – Asian Lions, will be vital in what promises to be a volatile 12 months.
The anaemic US economy seems to be losing even more colour with consumer confidence falling to a 26-year low in March. Home prices have slipped 10.7 per cent and new home sales hit a 13-year low.
Even more worrying was that the production side of the US economy continued to weaken in March. A weak US dollar (see next story), which is driving record high exports, is the only bright spot, although the flipside is the low dollar fuels inflation by making imports dearer.
Prolonged weakness in the US, and signs that Europe is slowing (manufacturing in Germany for instance has been losing steam) suggest returns in those regions could be poor for at least the next 12 to 18 months.
While US weakness will affect Asia, we still believe the region offers the best investment returns over the next few years.
The Asian region is trading on an aggregate valuation of 13 times 2008 earnings, down from 15 times in the last quarter, which highlights the improving valuations.
The engines of regional growth – India and China – have been revised down slightly, to 7 per cent and 10 per cent growth respectively, but still look positively booming compared to the likely negative economic growth in the US this year.
