Asia’s two biggest economies are showing some signs of getting to grips with problems that weighed on their financial markets in the first half of the year, and that may bode well for their equities.
That’s the view of UBS Global Wealth Management and Aberdeen Standard Investments Ltd, which cite encouraging earnings growth in China and a pickup in vaccination rates in Japan among reasons for their optimism. Japanese equities are the most preferred asset class in UBS Global’s universe, due to attractive valuations and expectations for a rebound in consumer spending.
Such confidence comes at a time when many investors see reasons to be cautious on Asia’s two largest stock markets. Betting on Chinese equities is a brave call as regulatory crackdown on the technology sector intensifies. And in Japan, many traders are waiting for the end of the Tokyo Olympics and the lifting of the capital’s state of emergency before deciding whether to enter the market.
Japan could even outperform on a global level as “the market is perfect proxy for the global upturn,” she said.
Any rebound in sentiment towards Chinese and Japanese equities could help Asian stocks catch up with their global peers, given that the two markets account for more than half of the MSCI Asia Pacific Index.
The regional gauge has climbed less than 3% this year, while the S&P 500 and the MSCI Europe Index have both risen more than 14%.
China’s benchmark stock index, the CSI 300, has fallen 2.2% this year as government clamped down on market speculation and traders became concerned about potential monetary tightening. While Japan’s Topix has risen 7.1%, it trimmed earlier gains as optimism over the control of the virus was dashed by
repeated states of emergency.
Chinese data showed the economic rebound steadied last quarter, as consumer spending exceeded consensus and manufacturers stepped up investment.
Of 1,187 companies listed in Shanghai and Shenzhen that have disclosed first-half earnings forecasts, 76% of the results are positive and about a third saw net profit more than double, according to the China Securities Journal.
UBS Global Wealth sees valuations in Japanese stocks as appealing given the company’s forecasts for 40% growth in earnings per share this year. The figure is derived from Japan’s high reliance on exports, and an acceleration in vaccination rates.
The Topix is trading at about 15 times its forward earnings, compared with about 18 times in February, according to data compiled by Bloomberg.
Aberdeen also cites the increased trend of vaccinations as helping to reduce Japan’s underperformance. Woon sees “green shoots” of improving earnings growth, particularly in the consumer and industrial automation sectors.
The outlook for shares in China and Japan looks promising on at least one other measure. The aggregate analyst forecast is for a 24% gain in the CSI 300 over the next 12 months, and a 16% rally in the Topix. That compares with just 9% for the S&P 500.
To Richard Kaye, a portfolio manager at Comgest Asset Management Japan Ltd., the prospects for both Chinese and Japanese stocks are bright for a much longer period than just the second half.
“The catch-up potential in China, the potential for margin improvements and governance improvements in Japan — those are still very big stories that can drive profit growth for a very long time,” he said.