Asian equities to stay bullish for some time, says HSBC strategist

MANILA, Philippines – The bullish cycle in Asian equities still has a long way to go on the back of favorable underlying fundamentals, with corporate earnings likely to do well despite mediocre economic growth in the US and Europe, according to a visiting equity strategist from British banking giant HSBC.

For investors who have long-term funds to spare or for instance, saving to buy a house in a year or two, HSBC head of equity strategy for Asia-Pacific Herald Van der Linde told a press briefing on Monday that equities would be the way to go.  But for those seeking optimum returns, he said they could consider markets other than the Philippines, where equity prices have risen sharply in recent history.

“The Philippines is a great story but it’s one of the most expensive regional markets at present,” Van der Linde said, noting that based on HSBC’s tracking of global funds, people have “maxed out” their ownership of local stocks.  He added that some global funds have likewise taken money out of Indonesia and shifted to the Philippines.

From such a perspective, Van der Linde said for investors seeking for the most upside, HSBC would recommend markets where stocks have been trading at cheaper levels relative to earnings prospects and where funds have been “under-invested” relative to historical levels like China, Taiwan and India.

Asked if Asia has been in a stock market bull cycle, Van der Linde said the region has been probably nearer to the bottom than the peak.  In a scale of 0 to 100 where 100 would be the peak, the analyst said this cycle has been at around 25, suggesting the region’s bull run in the early stages.

Asian equities, he said, have been quite cheap at 14.5 times projected earnings for 2012. “Asia is still trading at 8-9 percent valuation discount,” he said.  At about 15.3x price multiple, however, he said Philippine equities have become quite expensive relative to regional peers.

Corporate earnings in the Philippines are expected to grow by about 12 percent in 2012 on the back of 9.6 percent growth in sales, in turn supported by a low-interest rate environment.  The analyst said this was a “reasonable” earnings expectation.

Across the region, he said earnings forecasts have been upgraded in the last three months but most analysts were still cautious on their recommendations.  But he said in general, the pace of economic growth in the region and the fact that a lot of corporations in Asia had so much cash to deploy could fuel further growth.  In the last few years, he said a lot of companies were reluctant to boost capital spending due to cautiousness on developed markets but with the return of confidence, ample cash would be there at their disposal.

In the Philippines, he said the government’s public-private partnership projects could be one catalyst for earnings growth.

Leif Eskesen, HSBC chief economist for Southeast Asia, noted the improved momentum in Asia especially as policy progress in Europe resulted in better export earnings for export-oriented Asian economies in the first half.  But he said more headwinds might be coming because the European Union would likely get worse before the picking up towards the end of the year.

“Asia isn’t immune but domestic demand should provide cushion,” he said, noting that Asia would thus likely have a soft landing. In countries like the Philippines and Indonesia, he said the demographics were favorable and that the growth in the middle class was supporting consumption growth.

HSBC expects economic growth in the Philippines to pick up by 4.4 percent this year from 3.7 percent last year.

He said the good news was that domestic sources of growth were quite strong in the Philippines this year, supported by public spending, accommodative monetary policy and consumption growth.

Like the rest of the region, he said the Philippines should brace for renewed slump in exports in the next couple of quarters.  “So exports will still be a drag on growth this year but less so compared to last year. Remittances will remain resilient so overall, we expect the growth rate to be quite solid,” Eskesen said.