Market turnover year-to-date has been quite thin, suggesting a lack of conviction on both the upside and downside. Volatility has also impacted the IPO market where debut performances have been lacklustre.
But we believe there are two key reasons why investors should be optimistic for the outlook for the region in the second half of the year.
China is resilient
Resilient earnings growth, coupled with the market being somewhat out of favour over the past year or so, has made Chinese valuations more appealing with a PE ratio at 11-times and earnings per share growth of 16%.
But the key for Asian markets over the next six months is China’s monetary policy, as many Asian firms are increasingly dependent on Chinese consumption to drive growth. The People’s Bank of China has the suitable tools and balance sheet strength to implement appropriate measures, and if it concludes the tightening cycle in the next few months as we expect it to, Asian stock markets are likely to recover.
Elsewhere in the region, the strong rise in input costs, higher commodity and energy prices, plus strong consumption growth and structural changes of key economies within the region will see policymakers ensuring that inflationary pressures don’t supersede growth prospects.
Korea and Taiwan benefit from inflows
Year-to-date within the region, South Korea and Taiwan have been prime beneficiaries of inflows. In June, Taiwan was an outperformer in terms of fund flows as investor conviction rose due to improved cross-Strait relations. South Korea will continue to enjoy a dynamic economy as one of the strongest markets that has been driving world growth.
South Korea is an interesting and attractive market at the moment. After a good year in 2010, its companies will post record high earnings close to 90 trillion won again this year – almost double the average earnings for non-financial companies between 2004 and 2007.
Besides the size of earnings, the quality has also improved. South Korean auto companies continue to post a utilisation rate of over 100%, while Japanese automakers saw a sharp decrease from over 85% to around 35% after the earthquake. US auto makers also experienced a decrease recently.
Accordingly, the market share of South Korean auto companies in the US reached over 10% and an upward trend is expected to continue.
So, should investors put the negative headlines and global worries to one side? It’s very difficult to be bullish when we see headline after headline telling us how bad things are and how much worse things are going to get. But there are some positive signs out there too and Asian markets are well placed to benefit from them as the year comes to a close.
