This region’s shares will climb a wall of worries: Societe Generale

World currencies

Societe Generale is sticking with an Asia bull market thesis, pointing to the three necessary conditions it says are still in place: reasonable valuation, abundant liquidity and decent earnings growth.

“We expect a moderate upside for Asia ex-Japan equities, 10-12 percent from the current level, in line with the growth in earnings,” Societe Generale said in a note dated Friday, adding it indicated a 12-month forward price-to-earnings ratio of 13 times, in line with the long-term average.

Equity valuations ‘attractive’

It said that if its earnings growth assumptions are correct, then equity valuation is “moderate, even attractive.”

To be sure, Societe Generale noted that fund flows into Asia face a “bumpy road,” amid rising equity volatity and higher U.S. Treasury yields, which have triggered some net outflows from Asian markets.

“A shifting volatility regime and higher interest rates mean a tightening of U.S. financial conditions, a bearish point for Asia equity markets,” it said. “But this risk is manageable in an environment where the dollar does not strengthen.”

Favourite markets in Asia

Within Asia ex-Japan, it tipped its favourite markets as South Korea, on valuation, earnings and detente on the Peninsula, and emerging Southeast Asia on its lower sensitivity to U.S. equity market turbulence and improving fundamentals.

It is particularly positive on Thailand, Malaysia and Indonesia as the most resilient in a period of an S&P 500 bear market. But it noted the Philippines was an exception.

Is China’s old better than new?

It said it’s neutral on China, despite improved valuations, as economic momentum is fading. It also pointed to renewed protectionist threats from the U.S. and concerns over the unintended consequences of deleveraging. The bank set a year-end target of 13,500 for the HSCEI, near its January high.

The bank also noted that the gap between consumer-related names and the rest of the market, offshore, remains dramatically wide, with MSCI China consumer-related sectors trading at 50 times earnings, while the rest is at 15 times. Societe Generale said it was rotating to China’s old economy sectors. It expected the HSCEI would outperform the MSCI China, citing the large valuation gap between old and new economy stocks.

India earnings questions

It was a “tactical underweight” on India on a combination of politics and overly optimistic earnings growth forecasts, which suggested a sideways market is most likely.

“The corporate earnings growth trend in recent quarters has been encouraging and shows that the effects of demonetization and GST implementation are fading,” Societe Generale said. “We are less enthused about the earnings growth estimates of 2018 and expect the market to remain under pressure due to rising bond yields, slower earnings growth and waning foreign investor confidence, even though domestic liquidity remains supportive.”

Japan equities ‘cheap’

Societe Generale has a strategic overweight on Japan on earnings, undemanding valuation and favourable policy mix. It has a Nikkei year-end target of 24,500.

“This is one of the few developed markets where the long-term earnings growth prospects have improved,” it said. “This, coupled with compressed JGB yields for a sustained period of time, makes equities very cheap.”

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