5 Reasons to Buy Asian Stocks By Robert Guy
Bank of America Merrill Lynch is out today banging the drum for investors to load up on Asian stocks, making the case for investors who are underweight to be double-weighted in Asia ex-Japan/emerging markets in their benchmarks.
The broker argues that
(1) Asian equities look better value at 8.5 times EV/EBITDA compared to 13.6 times for U.S. stocks,
(2) Asian EPS growth expectations are low at 2% and bottoming out,
(3) Asian currencies are now more competitive, and
(4) state-owned enterprises with low returns on equity are much smaller portions of major indices in China and India than in the past.
But the big reason the broker is upbeat is their forecast that returns on equity for Asia ex-Japan stocks could rise from 11% to 14% over the next three to four years.
Here’s BAML in their own words;
But the ROE drop from 16% to 11% from 2010 to 2015 was mainly driven by the drop in asset turns from 90% to 60% – tighter fiscal and monetary policies, and the drop in China’s nominal GDP growth from 18% to 6%. The good news is that real interest rates are falling for a majority of Asian markets, and fiscal policy is easing in most of them.
A rise in asset turnover in the region in the next two-three years is highly likely – we think from 60% to 80%. Based on these four ROE drivers (capex/GDP, currency, fiscal and monetary policy), China, Korea, Thailand, Singapore and Taiwan lead the pack in ROE prospects; India, Malaysia bring up the rear.
And the good news is that the higher ROEs will translate to higher price-to-book valuations over the coming few years;
From 1.4x today, Asia ex-Japan’s PB could rise 45% in the coming 3 years – 26% to get back to fair value, 19% if the ROEs rise from 11% to 14% as we project. We have already seen 20% increases from the lows of the year, so we expect more to come.
In our view, the time to be a bearish philosopher is over, the time to participate in a bull market has (already) arrived. Given the recent rally, risk-love is a bit elevated – any weakness in markets should be viewed as an opportunity, we believe.
Source: Barron's Asia
http://blogs.barrons.com/asiastocks/201 ... an-stocks/
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