Goldman Sachs cuts outlook for Asia stocks, but still calls them ‘attractive’

World currencies

Goldman Sachs cuts its outlook for Asian equities, but it added that they remain “attractive” despite headwinds from escalating U.S.-China trade frictions.

It lowered its 12-month MSCI Asia ex-Japan Index target to 625 from 640. It set three-month and six-month targets of 565 and 585, respectively.

That was after Asian equity markets touched year-to-date lows amid the trade battle, with the White House imposing or set to impose tariffs on US$50 billion of Chinese exports to the U.S., while China has issued a list of US$50 billion of U.S. imports to tariff, it said.

“While the economic and earnings impact of the announced tariffs is likely to be small, markets seem to be pricing the risk of further escalation and continuing uncertainty,” Goldman said in a note last week. “Moreover, this trade dispute comes against a backdrop of slowing and less-synchronized global growth, tightening U.S. monetary policy and a firmer dollar. Together, these constitute challenges for regional equities.”

Goldman said its analysis suggested that a 5 percent decline in U.S. import growth could lead to an 8 percent drop in the aggregate MSCI Asia ex-Japan index over three months, with South Korea, China and Taiwan facing the most downside, ranging from 8-10 percent.

But it added that its target for the index still suggested price and total return levels in the U.S. dollar of 12-15 percent; “Asian
equities remain attractive even with a less-favorable global backdrop.”

Goldman said gross domestic product growth in the region was above trend at 6.4 percent, while it forecast earnings per share growth at 10-14 percent for 2018-19 and it noted that valuations have compressed to 12.7 times forward price-to-earnings, its 10-year mean and a more than 25 percent discount to the U.S.

Additionally, net foreign investor selling in emerging Asia has been US$20 billion year-to-date, or 90 percent of 2017’s net buying, it noted, adding that global mutual funds are underweight the region, which it said suggested positioning is “fairly clean,” and that “momentum-chasing money has exited.”

It kept China and India at Overweight, while rating Singapore, South Korea, Taiwan, Hong Kong, the Philippines and Indonesia at Marketweight. It rated Malaysia, Thailand and Australia at Underweight.

Goldman upgraded health care to Overweight and cut Asia ex-Japan banks and metals & Mining to Marketweight. It remained Overweight on software, insurance and other financials, and consumer retail and services.

After screening for Conviction List Buy-rated names aligning with its macro, micro and thematic views, Goldman tipped Sunny Optical, Country Garden, Alibaba, Ping An Insurance, AAC Technologies, Midea, China Resources Beer, Wesfarmers, Suncorp Group, Samsung Electronics, Lotte Chemical, TVS Motor, Avenue Supermarts, Britannia Industries and Bank Rakyat Indonesia.

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