From a valuations perspective, apart from the depths of 2008, there aren’t many periods in the course of the past 20 years where you could argue that equities were as valued as low as they are today. However, we need to recognise that while equities are cheap, they are cheap for a reason and they may stay cheap for a while longer.
Focusing on the Asia Pacific ex-Japan region, it is worth noting that the stock market is trading at a forward PE of 10.5x, which is at a deep discount to the five-year average of around 13x. This is more than one standard deviation away from the five-year average. Similarly, on a price-to-book basis, the current valuations are 1.8x book value (compared with the five-year average of 2.1x), and the returns on earnings are much higher than that of ten years ago. We can’t forget that Asian corporate balance sheets continue to be in very healthy shape, and economic growth continues in Asia.
So, from a valuation standpoint, this is the second best time to be buying Asian stocks in a decade. There are risks in the US and Europe but these risks are more than priced in at the moment. I am still comfortable with the growth outlook in Asia, which should significantly outpace the rest of the world in the coming years.
There are also some positives for Asia that arise from slower global growth. Many Asian economies (including China, Singapore, Korea Taiwan and India) have introduced policy-tightening measures, removing stimulus that was provided during the global financial crisis in 2008.
There are two key reasons for this. First, the stimulus is no longer needed in Asia as the economic growth path has been re-established, and second, growth in some countries (India and China) has been so strong that inflationary forces have become more apparent. So policy needed to be tightened to help combat inflation that is above target levels in many countries in Asia.
Slower global growth and the resultant lower commodity prices (especially oil prices with Asia being a big energy importer) will help to reduce some of the inflationary pressures in Asian economies. This will provide policy makers a reprieve on what was expected to be further tightening measures.
If you can stomach daily volatility there could be some attractive buying opportunities for investors with a longer-term horizon. The key is to look through the volatility and analyse the underlying value available in the market.
