Despite a volatile first quarter, Goldman Sachs said it was sticking with a positive view of Asian markets.
“Asian fundamentals are solid as macro and earnings growth remain robust, valuations are inexpensive and positioning/flow backdrop remains supportive,” it said in a note earlier this week.
Additionally, it said Asia’s market risks were mostly “exogenous,” stemming from U.S. trade policy, U.S. interest rates and U.S. equities. It noted the tariffs the U.S. announced on China imports are not substantial enough to change its macro economic or earnings forecasts.
“We think both trade and rate concerns don’t warrant a change in our positive view unless we either see a significant escalation in trade restrictions (which would impact growth) or a sharper than expected rise in rates,” Goldman said. “However, a U.S. equity downturn could hurt Asian stocks but the beta would likely be lower (given better macro, earnings and valuation mix) than during past episodes.”
It raised its 12-month MSCI Asia Ex-Japan index target to 640 from 630, implying a 14 percent U.S. dollar return and a 17 percent total return including dividends. It said it was staying overweight on the index in a global context.
For allocations, it stayed Overweight on offshore China stocks, added an on-shore A-shares Overweight, cut South Korea to Marketweight and shifted its Southeast Asian preferences to cut Thailand to Underweight and raise the Philippines and Singapore to Neutral from Underweight. It upgraded consumer retail and services to Overweight, citing an improving earnings outlook.
It kept India at Overweight and Australia at Underweight.
It said China remained its strongest Overweight market, largely due to its 21 percent earnings growth and inexpensive valuations at 12.1 times forward earnings.
South Korea downgraded
It downgraded South Korea to Marketweight from Overweight, citing fewer imminent catalysts ahead to drive outperformance.
“While a beat in SEC first-quarter earnings and reducing geopolitical tension in the Korean Peninsula are favorable developments, they seem to have resulted in much smaller-than-expected market response,” it said. “The announced restructuring plan of the Hyundai Motor Group is less significant than expected.”
While South Korea’s price-to-earnings multiple is inexpensive at 8.5 times, a 33 percent discount to the region, that may be discounting slower earnings growth ahead, Goldman said.
It cut Thailand to Underweight, citing three factors.
“First, we believe the strong rally in the energy sector, a key driver of the index performance, has arguably priced in a large part of the oil price move. Second, banks’ fundamentals are deteriorating. In particular, the asset quality of consumer loans seems to have worsened,” it said. “Third, the price-to-earnings multiple of Thailand has risen to 18-year high, despite its earnings growth being one of the lowest in the region.”
Philippines and Singapore upgraded
It raised both the Philippines and Singapore to Neutral.
For Singapore, Goldman said it forecast “moderate” earnings growth recovery to 12 percent, up from 2017’s weak 6 percent, amid improvement in banks’ profits and a property-cycle recovery.
For the Philippines, Goldman pointed only to that market’s underperformance over the past six months.