9 February 2024
Weekly Market View
The race to boost Asian valuations
Asia ex-Japan equity markets saw a revival in investor sentiment this week. The trigger: attempts by policymakers in China and Korea to boost equity market valuations and revive investor confidence These measures follow Japan’s arguably successful efforts in recent years to improve shareholder value.
While China’s measures are promising, its fundamentals will need to improve for a sustainable rally in equities to take hold. While China equities remain a core holding in our Asian foundation allocations, we see tactical opportunities in its state-owned enterprises sector as they respond to the government’s attempts to boost shareholder value.
South Korea remains our preferred equity market in Asia ex-Japan; the latest government proposals to boost valuations supports this preference.
Globally, the US equity market, with its relatively higher return on equity, and Japan, with earnings tailwinds from a weak JPY, remain our preferred equity markets.
Do you expect China’s latest stimulus measures to mark the trough for Chinese equities?
What are the implications of China’s latest policy measures on Asia’s High Yield bond markets?
What is the outlook for the AUD after the RBA’s latest policy meeting?
Charts of the week: A wide dispersion in value
India and Taiwan, the most expensively priced Asian equity markets, are backed by strong return on equity estimates
P/E ratios of key equity markets vs own history
Valuation and earnings metrics of key Asian equity markets*
Source: Bloomberg, Standard Chartered; *all valuation metrics are based on 12-month forward earnings estimates
Editorial
The race to boost Asian valuations
Asia ex-Japan equity markets saw a revival in investor sentiment this week. The trigger: attempts by policymakers in China and Korea to boost equity market valuations and revive investor confidence. These measures follow Japan’s arguably successful efforts in recent years to improve shareholder value. While China’s measures are promising, its fundamentals will need to improve for a sustainable rally in equities to take hold.
While China equities remain a core holding in our Asian foundation allocations, we see tactical opportunities in its state-owned enterprises sector as they respond to the government’s attempts to boost shareholder value. South Korea remains our preferred equity market in Asia ex-Japan; the latest government proposals to boost valuations supports this preference (see page 6). Globally, the US equity market, with its relatively higher return on equity, and Japan, with earnings tailwinds from a weak JPY, remain our preferred equity markets.
Reviving China’s investor confidence: China’s authorities have taken steps to stem a continued slide in its equity markets. These range from policy rate cuts, measures to boost bank lending, restricting short-selling and directing state funds to boost equity purchases. This week, it replaced its top securities market regulator. While the measures suggest a more coordinated effort to revive investor confidence, more forceful fiscal and monetary policies are needed to revive business and consumer confidence, support the property sector and reverse growing deflationary pressures – this week, data showed consumer prices slumped the most y/y since 2009. Until then, we see tactical opportunities in China’s state-owned enterprises sector, which is likely to be the first to respond to government directives to boost shareholder value through stock buybacks and higher dividend payments (see page 4). We also prefer communication services, technology and consumer discretionary sectors in China, which are likely to benefit the most from the government’s targeted policy measures.
US remains top preference globally: The stronger-than-expected Q4 23 earnings season supports our preference for the US equity market globally. While average earnings growth is now estimated at 9%, up from the 4.7% expected at the start of January, our preferred communications services (+54%) and technology (+21%) sectors have delivered among the strongest earnings growth. In terms of revenue growth, our three preferred US sectors – healthcare (7.7%), technology (+7%) and communications services (+6.5%) sectors – topped the rankings on the back of structural drivers such as Artificial Intelligence, cloud computing and demand for semiconductors.
Sustained US economic resilience: January’s data showed the US economy continues to generate more jobs than expected (although falling number of weekly hours worked suggests underlying demand for labour is softening). Meanwhile, still-robust services sector and a cyclical pick-up in manufacturing suggests the post-COVID expansion could extend longer than previously expected. The Atlanta Fed GDPNow is projecting 3.4% annualised growth in Q1 2024.
Inflation pressures: Sustained economic growth amid a tight job market has raised the risk of a revival in wage pressures (average weekly earnings growth accelerated to 4.5% y/y and the Atlanta Fed’s median wage growth, while slowing, remains high at 5% y/y). Also, manufacturers have started to pay higher prices for their inputs for the first time since April (ISM report). The strong data supports our view that the first Fed rate cut will come later than the market expects (we forecast a June cut).
Investor diversity and investor positioning in US equities remain stretched, sustaining the risk of a near-term pullback. Nevertheless, we remain Overweight US equity markets in our foundation allocation, given strong earnings and economic backdrop. To hedge against the risk of a revival in inflation, last month we added US short-duration inflation protected bonds to our portfolio. Other potential inflation hedges include gold, infrastructure assets and energy sector equities.
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as neutral for risk assets in the near term
(+) factor: China policy support, strong US payrolls, ISM services, bond auction
(-) factor: Hawkish Fed comments, regional bank concerns
US job creation beat expectations in January, but underlying indicators suggest the demand for labour is slowing
US net new non-farm jobs, average hours worked
Euro area consumption was weaker than expected, but investor confidence improved more than expected
Euro area retail sales and Sentix investor confidence
China’s deflation accelerated in January
China consumer and producer price inflation
Top client questions
Do you expect the latest stimulus measures from China’s government to mark the trough for Chinese equities?
A series of supportive measures in China last week – including the replacement of the head of securities regulator and Central Huijin Investment’s intensifying purchase of China’s ETFs – has improved investor sentiment and halted the fall in Chinese equities YTD.
We expect a policy-driven rebound in both China’s onshore and offshore market in the near term, led by the state’s purchase of A-shares through the stock connect programme, alongside depressed valuations and light investors’ positioning. We continue to believe China’s state-owned enterprises (SOEs) look increasingly attractive – Bejing’s recent focus on improving “market capitalisation management” for SOEs is expected to support their share price and enable them to weather uncertain market conditions.
That said, prolonged deflationary pressures will likely limit prospects of medium- to long-term upside in the market. China’s consumer prices (CPI) fell for the fourth month in January, marking its steepest decline (-0.8% y/y) since the GFC in 2009. The Producer Price Index (PPI) in January beat estimates but remained in deflationary territory. A grander-scale, more forceful stimulus, designed to revive domestic demand and re-ignite the positive “loop-back” effect into consumption, is needed to boost sentiment on a sustainable basis.
— Michelle Kam, Investment Strategist
China equity markets saw an uptick in foreign fund inflows from late January
Cumulative China northbound (Hong Kong to Mainland) net foreign inflows and MSCI China index
What are the implications of China’s latest policy measures on Asia’s HY bond markets?
Asia High Yield (HY) bonds have delivered YTD return of c.3.0% and outperformed Asia Investment Grade (IG) by 3.2 percentage points. Policy support in China is undoubtedly key as China HY bonds account for about 26% of the asset class, and 52% when Hong Kong and Macau HY bonds are included. The rebound of Chinese property bonds was remarkable despite still-weak contract sales.
It is notable that price rebound of the non-property bonds, such as the financials and industrials, has followed suit. Non-China HY bonds have also contributed to the outperformance due to (i) positive issuer-specific developments, such as a successful Indian HY bond restructuring and expectations of a smooth election in Pakistan; and (ii) favourable supply-demand balance due to lack of Asia USD HY bonds supply.
We continue to expect Asia HY USD bonds to outperform their IG counterparts against the backdrop of global monetary easing prospects. However, a weaker-than-expected economic outlook, geopolitical uncertainties and any resulting rating downgrades or defaults are risks that need to be closely monitored.
— Cedric Lam, Senior Investment Strategist
Asia HY USD bonds continue to offer attractive yield premium differentials over Asia IG USD bonds, despite the recent rally
Yield premium differentials
Top client questions (cont’d)
Is there a risk of weakness in commercial real estate (CRE) spreading to the global financial sector?
We have seen banks in the US, Europe and Japan warning recently about significant loan losses in the US CRE space, resulting in dramatic declines in the affected banks’ share prices. None of the large or systemically important banks have been impacted so far, but concerns remain on how far this could spread. Within the US, small- to mid-sized banks hold most of the CRE loans. Senior bank executives and regulators have noted the CRE downcycle and associated problems are likely to take years to resolve, during which time we expect more small- to mid-sized banks to close or merge with stronger peers.
Technically, banks with ample capital can extend the maturity of CRE loans and effectively “spread out” the problem over several years to make it more manageable. What is more concerning is a sudden loss of confidence in a bank – for the right or wrong reasons – which can result in a “bank run”, triggering a liquidity crisis. However, given the issue is already in the spotlight following several US bank failures last year, we expect regulators to be proactive in protecting the confidence in the financial system. More small- to mid-sized bank failures can be expected in this CRE downcycle, but we would not expect a significant crisis for the global financial sector.
— Fook Hien Yap, Senior Investment Strategist
What is the outlook for the AUD after the recent RBA meeting?
AUD/USD has weakened since the start of the year as investors took profit following the AUD’s Q4 23 rally and as the greenback strengthened. However, the RBA held interest rates steady at its latest policy meeting, while cautioning a further increase could not be ruled out given inflation was still high. We see a low probability of a rate cut in H1 24 given the RBA was not in a rush to start easing policy anytime soon. Australia’s Q3 23 economic growth stabilised at 2.1%. Although consumer inflation slowed in recent months, it remains high compared with most major economies.
We believe the RBA is likely to be one of the last central banks to cut rates. Hence, interest rate differentials are likely to act as a tailwind for AUD/USD, enabling the pair to test its resistance at 0.67. Meanwhile, China’s consumer prices fell the most since 2009 in January. Rising deflation risk, soft domestic demand and property sector challenges are likely to put pressure on the CNH. Therefore, we initiated a bullish AUD/CNH view, with a target of 4.8270, to capture the divergence between the two economies.
— Iris Yuen, Investment Strategist
Small- to mid-sized US banks account for 77% of commercial and real estate loans, although they account for only 14% of investible bank equities
Share of US CRE loans among small- to mid-sized banks (less than USD 250bn in assets) and large banks
Weight in MSCI USA investible market index of banks of small- to mid-sized banks (less than USD 250bn in assets) and large banks
We have a bullish view on AUD/CNH on the back of rising interest rate differentials
AUD/CNH with technical support and resistance levels
Top client questions (cont’d)
Do you expect South Korea’s proposed legislations to improve shareholder returns to yield results?
The South Korean government has announced the ‘Corporate Value-Up Program’ to improve stock market efficiency. It is an effort to benchmark the Japanese stock market, which has been classified as a typical low price-to-book ratio (PBR) stock market alongside Korea’s. Japan’s equity market has delivered an outstanding performance in the last 12 months, supported by government policies to improve companies’ corporate governance. South Korea’s programme aims to encourage companies with a PBR of less than 1 to realise their value and to expand the tax-free benefits of the Individual Savings Account (ISA). Since the announcement of the programme, fund flows have been positive. Foreign funds have turned net buyers, and fund exposure has been broadening out from the semiconductor industry into low PBR sectors, such as banks, securities insurance and auto, as they are expected to benefit from the policy.
It is important to note the programme is still in the draft stage, and uncertainties remain on whether the policy will translate into actual, positive corporate actions. While the policy momentum has boosted low PBR sectors so far, we believe the market will eventually refocus on the fundamentals. As such, it is important for investors to focus on sectors with attractive valuations and high profitability.
The auto sector is one such example. We expect this to outperform the broader Korean market on the back of robust sales volumes and an improving product mix toward higher-value vehicles. We have seen shareholder-friendly policies, such as share buy-backs in 2023, and more such plans are likely to be announced after the government’s new measures are unveiled.
The government’s proposal is a fresh tailwind that strengthens our Overweight recommendation for Korean equities within the Asia ex-Japan region. We expect continued recovery in South Korea’s earnings estimates, led by improving demand-supply dynamics in the semiconductor industry. Compared to its regional peers, Korean equities are priced at a discount, especially versus Indian equities. Additionally, Korea’s equity market does not suffer from the geopolitical and structural economic uncertainties faced by China’s equity market.
— Dong Hee HONG & Jong Won CHOI, CFA,
Investment Strategy, South Korea
In South Korea, we prefer sectors with high profitability and cheap valuation
Measure of profitability (12m forward ROE) vs. valuation (12m forward PB)
Market performance summary*
*Performance in USD terms unless otherwise stated, 2024 YTD performance from 31 December 2023 to 08 February 2024; 1-week period: 01 February 2024 to 08 February 2024
Our 12-month asset class views at a glance
Economic and market calendar
S&P500 index has immediate resistance at 5,016
Technical indicators for key markets as of 8 February close
Investor diversity points to a reversal in US equity markets
Our proprietary market diversity indicators as of 8 February
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