Asian stocks poised for record close on rally

A MEASURE of Asian stocks, already outperforming US and European peers this year, was set for a record close as investors bet the global bull run still has legs.

The MSCI Asia Pacific Index rose 0.7% to 173.07 as of 11.21am in Hong Kong on Nov 9, soaring past its November 2007 closing peak of 172.32.

Japanese and Hong Kong stock indexes led the region higher as the Nikkei 225 Stock Average rose above 23,000 for the first time in 25 years amid strong corporate earnings. Chinese shares listed in Hong Kong were also poised for their highest close since July 2015 with insurers leading gains. Materials led all 11 industry sub-groups on the Asian gauge higher.

“We are still in the sweet spot for Asian equities as the global economy is strengthening, profit growth is strong and monetary policies are easy,” says Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney which manages around US$140 bil (RM592.2 bil) in assets worldwide. “I see no euphoria yet and would wait for declines to deploy more.”

Technology stocks have been key contributors to the rally this year with Tencent Holdings Ltd, Alibaba Group Holding Ltd and Samsung Electronics Co providing the biggest boosts to the gauge.

Companies in the region have also benefited from the synchronised global recovery that has supported Asia’s export-oriented economies. Firms on the benchmark index are expected to report average earnings growth of about 13% this quarter, almost twice that of the S&P 500 Index which has set multiple records this year.

The Asian benchmark has climbed 28% so far this year, while the S&P is up 16% and the Stoxx Europe 600 Index has advanced 20% in US dollar terms.

“What we have had in Asia in particular, and in emerging markets in general, for many years since 2010 or so is that expectations are always too high and companies cannot deliver relative to those expectations – now this has reversed,” says Mikio Kumada, a Hong Kong-based global strategist at LGT Capital Partners. “Asia is cheap given that corporate growth has come back to the region.”


‘Most attractive’

Within the region, equity indexes from South Korea to India are holding close to record highs. Japan’s Topix index and the Nikkei 225 are repeatedly setting new milestones amid a strong earnings season, a weaker yen and Prime Minister Shinzo Abe’s landslide re-election. Australia’s ASX 200 Index on Nov 7 exceeded 6,000 for the first time since the financial crisis.

“Japan is probably the most attractive story in Asia,” Hans Goetti, the founder of HG Research says by phone in Singapore. “You have an economy that is growing, relatively tight labour market and more women entering the workforce.”

Hong Kong’s Hang Seng Index’s 33% rally this year makes it the region’s best performer among major markets as Tencent – its biggest component at 11.7% – is expected to continue to defy analyst expectations. The Chinese internet giant posted record profits in the last two quarters.

Some technical signals, however, show that stock gains may be overdone. The year-to-date rally has made the Asian measure more expensive than the S&P, while its 14-day relative strength index has held above 70, a level often seen as overbought, since Oct 30.


Policy imperative

For Goetti, risks are focused around the US Federal Reserve’s policy decisions. Equity investors would be in trouble should interest rates be raised too high for the world’s largest economy to sustain economic growth, he says.

“That would be something that could derail sentiment,” Goetti says. “It would filter into US stocks and cause a pullback everywhere.”

Still, LGT Capital’s Kumada, expects the region’s stocks to continue to advance amid a “near ideal macro situation” with “robust” world economic momentum and “on-target” inflation.

“We have reduced risk over policy error if you look at the major central banks,” he says, noting the Fed decision to stick to gradual rate increases was “a very good one” and that Abe’s re-election suggests Japan will stick with its massive monetary stimulus programme.

This article first appeared in Focus Malaysia Issue 258.