- Asia is reopening progressively and further traction on the reopening should support economic momentum in 3Q/4Q. Despite moderating, macro data show that exports and manufacturing remain supported. China is also easing on all fronts, which will greatly support the region.
- Asian equities are less vulnerable to the risk of earnings disappointment relative to other major markets as consensus has been pessimistic and heavy-handed in earnings revision. Earnings growth will face near-term challenges but long-term secular support remains firm.
- Asian equities have de-rated significantly and valuations are attractive. The region’s forward PE ratio is trading at a 12% discount relative to its long-term average.
- On balance, the risk-reward for Asian equities is improving after the sell-off this year. We now expect a 43% upside by end-2024.
Chart 1: 1H22 has been challenging for Asian equities, but prices are gaining momentum lately
1. Asia re-opening a key driving force
Table 1: PMIs remain above 50 (expansionary territory) for most Asian economies.
Source: Bloomberg Finance L.P., iFAST compilations. Data as of Aug 22.
Chart 2: Asia’s export growth improved in June and July. Leading indicator point to more support for exports
Chart 3: Amongst major economic regions, APAC is the only one that is seeing positive beats (on consensus estimates) at a greater magnitude since 3Q22.
2. China’s policy backdrop remains accommodative
3. Lower risk of earnings disappointment relative to other major markets
Chart 4: Earnings estimates for Asian equities have already moved lower relative to other major DMs
4. Intermittent earnings weakness but long-term outlook supported
Table 2: Earnings growth expected to rebound after the next few years
Source: Bloomberg Finance L.P., iFAST estimates, iFAST compilations. Data as of Aug 22.
Table 3: Historical EPS downgrade cycles for Asian equities
Source: Refinitiv Eikon, IBES, J.P. Morgan Equity Macro Research, iFAST compilations. Data as of Aug 22.
Compelling valuations after major de-rating
Chart 5: Asian equities have de-rated significantly since 2021 and are trading at a 12% discount to long-term average
Chart 6: Valuations are cheap across most sectors. Sectors with elevated multiples, are largely driven by drastic earnings downgrades.
Key risks
Improving risk-reward after sell-off
Chart 7: Earnings forecast and price performance of MSCI Asia ex-Japan Index
Table 3: Projections for the MSCI Asia ex-Japan Index
|
Asia (MSCI Asia ex-Japan Index) |
FY2021 |
FY2022 |
FY2023 |
FY2024 |
|
PE ratio (X) |
12.2 |
11.9 |
11.4 |
10.1 |
|
Projected earnings growth (YoY %) |
26.3% |
2.4% |
4.0% |
12.4% |
|
Projected Earnings Per Share (EPS) |
52.8 |
54.1 |
56.3 |
63.3 |
|
Target fair price (Based on 14.5X Fair PE ratio) |
- |
- |
- |
920 |
|
Potential upside (%) |
- |
- |
- |
43.3% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 25 Aug 2022. |
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