Asian equities follow their own path as fundamentals improve, says Allianz GI
Asian stocks are being shocked lower by Europe’s woes, but each time they are falling less sharply, as a result of their improving profitability and solid fundamentals, says Raymond Chan, Asia Pacific chief investment officer of Allianz Global Investors.
Each successive time Asian stocks fell in various crises since 1998, they had not fallen as far, as measured by price to book.
In 1998 they fell to just 1 times’ book, but in 2008 it was to 1.2 times, then last year they came to rest at about 1.5 times.
“Asian companies are continuing to grow profits and fundamentals support higher and better price to book ratios. As long as earnings growth and fundamentals are there, Asian markets should justify a higher price to book ratio,” Chan told delegates at Allianz Global Investors’ recent annual investor conference in Berlin.
While Asian equities have not provided a complete cushion from falls elsewhere in the world, there seems to have been an increasing recognition by investors that the two regions are distinct.
Chan said investors would “have to live with the volatility because Asian markets are still very much exposed to global growth and very much to fund flows, but if you pay close attention to valuations you will still make money over the long term.”
Chan pointed to the RCM Risk Appetite index dipping below 30 as a buying opportunity late last year. “At that point if you buy equities, you are buying the expectations of earnings recovery,” he said.
The index is still negative, but Chan said in the second half it should turn positive.
Price to forward earnings ratios for Asia ex-japan companies are below 12 times, and have only been this low on two other occasions since at least 1990.
He foresees a “complete reversal” of the tightening cycle Beijing has been through “and as inflation is no longer a problem we will not see a hard landing, and authorities already started to ease”.
He said loan growth in China had already come to light and M3 money supply “is already starting to rebound”.
“With [equity] valuations [in China] trading at around 10 times, this is a once in a lifetime opportunity there.” If history repeats itself, momentum investors could join the market when PE ratios hit 15x or higher, he says.
Chan is not universally upbeat about Asia – Indonesian stocks, for example, already reflect much of the good news, he says.
He pointed to some interesting trends in China.
Increasing automation of factories will accelerate as Chinese manufacturers seek to maintain margins. The Chinese government in its 12th Five Year Plan stated that it would promote the usage of automated machine tools in order to improve the production efficiency. Currently, the penetration rate is less than 30% – the same ratio as Japan had in 1988. Japanese manufacturers now have 83% automation.