Investors chasing surging stock prices of Asian companies that are most geared to global trade could be in for a reality check.
A flood of cash thanks to accomodative central banks, encouraging US economic data and a European lifeline for the region’s banking system have gotten global stock markets off to a roaring start to the year, with cheap money trumping risks to corporate earnings growth.
Money has first found its way into assets hardest hit by last year’s fears of a euro-zone led global meltdown. Funds in particular have made a dash for Asian equities, as riskier assets in emerging markets are once again in favour. The MSCI Asia Pacific ex-Japan index is up more than 13 per cent so far this year, after tumbling 18 percent in 2011. Still, analysts say it may now be time for investors to lock in profits from the recent gains in Asian materials, transport and microchip companies, which still suffer from weak underlying trends in their respective industries.
Fears that the US economy could fall into another ‘soft patch’ like last year and signs that Europe is sliding into recession are further reasons to take some money off the table.
“We’re going to get some days when things look pretty good but it’s going to be dragged back down by the reality of a much tougher environment for companies to operate in,” said Winston Sammut, investment director, Maxim Asset Management.
Asian shipping stocks are a case in point
They have run up sharply in a move attributed to improved global manufacturing data and industry bellwethers, such as Maersk raising freight rates. But that enthusiasm contrasts sharply with a bearish operating environment for shippers, with overcapacity and sluggish global trade now compounded by tighter bank financing for the debt-laden sector and rising fuel prices.
A similar story can be seen in Chinese steelmakers, which have rallied along with broader markets even though companies are facing cash shortages, shrinking profit margins and ugly balance sheets.
“What’s the catalyst? Buckets of cheap money flooding the planet are now being put to work as euro collapse fears abate,” said a senior Hong Kong-based trader at a large Asian brokerage.
The latest Bank of America Merrill Lynch fund manager survey reported a ‘stunning’ rise in asset allocation to global emerging market (GEM) equities to levels that have historically coincided with short-term underperformance. Globally, exposure to technology and emerging markets was ‘dangerously high,’ according to the brokerage.
Forty-four percent of those polled said they were overweight GEM equities compared with 20 per cent last month, the biggest month-over-month jump in the reading in 12 years.
Traders estimate last week’s $5.4 billion of inflows into emerging market funds have brought year-to-date inflows to $17.1 billion, more than a third of the outflow seen in all of last year and lifting regional stock indices out of a deep funk.
Chinese shares in Hong Kong, which late last year seemed to be caught in death-spiral, are up 16.2 per cent after tumbling 20 per cent in 2011.
“Market sentiment has been changing from fear to euphoria in just a month’s time, and there is a genuine risk that the market has already moved ahead of its fundamentals,” said Vincent Chan, head of China research at Credit Suisse in a note. Chan said the market is turning a ‘blind eye’ to weak Chinese data, including land sales and power output.
Show me the results
The big test ahead for Asia’s 2012 equity rally will be evidence of how corporate profit margins and sales are holding up in a weak economic environment. Investors will also be looking for signs that a recent rebound in global activity is sustainable, and not a temporary blip created by companies replenishing depleted inventories.
“Export growth is the Achilles’ heel at the moment for Asia,” said Citi Private Bank’s Woods.
“For the past two or three decades Asia has molded a growth model based on Western consumption and there is broad-based fiscal austerity underway over there at the moment,” he said. Yet, South Korean shipmakers, Taiwanese chipmakers and Chinese industrials feature prominently in a list of Asian companies that have seen the biggest returns so far this year.
