Classic boom-bust scenario underway
Merrill Lynch prefers equity markets in China and Korea, and says the best-of-breed investment theme will lead to outperformance.
Merrill Lynch forecasts a classic post boom and bust trading range of 200-350 points on the MSCI Asia-Pacific equity index this year.
Asia is trading at its cheapest level in 20 years, but Merrill Lynch expects earnings per share recovery will be significantly more shallow than consensus forecasts.
It favours China over India and Korea over Taiwan. It expects the best-of-breed investment theme to lead to outperformance and continues to recommend exposure to stocks that stand to benefit from the regionÆs consumption growth.
Cash-rich China is embarking on a secular uptrend versus an Indian corporate sector dependent on foreign capital, Merrill Lynch says in a report, while noting that Korean equities are a better contrarian position than the Taiwanese tech sector.
Within Asia, Merrill Lynch is overweight in telecommunications in Japan, China, India, Korea, Taiwan, Australia and Singapore; overweight in banks in India, Australia and Hong Kong but underweight in China and Singapore; underweight in real estate in Hong Kong, Singapore, China and Australia; and underweight tech and cyclicals in most countries.
The firm forecasts a weak Japanese equity market until the third quarter of this year, after which a trough in global economic indicators, a year-on-year recovery in corporate earnings and favourable political developments are expected to lead to a recovery.
Specifically, Merrill Lynch believes JapanÆs Topix index is likely to fall below 800 points in mid-January to mid-February as October-December quarter results confirm earnings declines. Although the stock market may rebound again in late-March on expectations of the Japanese governmentÆs stock price measures known as price-keeping operations, the Topix is likely to finish around 950 points, down 45% year-on-year. Reporting of annual results around mid-April to mid-May, accompanied by cautious estimates for many companies, is likely to trigger a stock market decline, with Topix possibly surpassing the previous October 27 bottom of 746 points and falling below 700 points, Merrill Lynch adds.
Asia is trading at its cheapest level in 20 years, but Merrill Lynch expects earnings per share recovery will be significantly more shallow than consensus forecasts.
It favours China over India and Korea over Taiwan. It expects the best-of-breed investment theme to lead to outperformance and continues to recommend exposure to stocks that stand to benefit from the regionÆs consumption growth.
Cash-rich China is embarking on a secular uptrend versus an Indian corporate sector dependent on foreign capital, Merrill Lynch says in a report, while noting that Korean equities are a better contrarian position than the Taiwanese tech sector.
Within Asia, Merrill Lynch is overweight in telecommunications in Japan, China, India, Korea, Taiwan, Australia and Singapore; overweight in banks in India, Australia and Hong Kong but underweight in China and Singapore; underweight in real estate in Hong Kong, Singapore, China and Australia; and underweight tech and cyclicals in most countries.
The firm forecasts a weak Japanese equity market until the third quarter of this year, after which a trough in global economic indicators, a year-on-year recovery in corporate earnings and favourable political developments are expected to lead to a recovery.
Specifically, Merrill Lynch believes JapanÆs Topix index is likely to fall below 800 points in mid-January to mid-February as October-December quarter results confirm earnings declines. Although the stock market may rebound again in late-March on expectations of the Japanese governmentÆs stock price measures known as price-keeping operations, the Topix is likely to finish around 950 points, down 45% year-on-year. Reporting of annual results around mid-April to mid-May, accompanied by cautious estimates for many companies, is likely to trigger a stock market decline, with Topix possibly surpassing the previous October 27 bottom of 746 points and falling below 700 points, Merrill Lynch adds.
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