UBS | Current year in Asia we expect c.8% return (in U$) driven primarily by earnings, from a 6% growth in revenues and a modest expansion of margins. We think multiples will be unchanged as a re-rating is unlikely given ongoing ‘Debtopia’ headwinds, and historically low valuations make further de-rating also less likely. Against the backdrop of soft growth, the credit cycle and Fed tightening, we continue to favour markets that can benefit from easing policy with limited fx risks and countries undertaking reforms –India , Japan , and China. Valuations in markets like Singapore and Indonesia now appear to reflect many of the credit challenges, large parts of the commodity crunch theme may be behind us , and some fundamental adjustment in macro imbalances has occurred.
We think the region faces 4 pivotal questions this year on tightening rate environment, China, earnings and valuation.
Q: How will APAC equities respond to Fed tightening?
A: Although we do see the Fed continuing to pose challenges for the region, with much already in the price and with some adjustment beginning to take place, we see this as a headwind, rather than a major threat in 2016. The subsequent rise in the US$ will pose a challenge to Asian equities, with the exception of Japan where this should be supportive.
Will China fears subside?
A: Until the residential investment adjustment is complete , the economy has stabilised, and China banks have worked through a credit cycle, we think investors will continue to have periodic jitters on China. Tao thinks the residential adjustment won’t be completed in Her forecasts are for a further slowdown in activity . Meanwhile, our banks team are expecting NPLs to rise alongside credit costs next year. It is likely therefore that fears over China will likely persist.
Q. Can AxJ earnings stop disappointing?
A: We think consensus forecasts don’t look unrealistic but would be more inclined to believe these have downside risk in the event of further growth disappointment, with limited confidence 2016 will represent huge upside surprise.
Q: Is there scope for a valuation re-rating?
A: We think AxJ equities have accurately reflected the credit cycle deterioration . If the Fed keeps rates low for an extended period, while earnings hold up, given Asia’s inexpensive relative multiples to both interest rates and global equities, there is upside risk to multiples. This is not our base case. Rather we think equities multiples are likely to remain flat – reflecting the credit cycle and growth risks and not catching up to other assets.