The bull market rally for Asian equities may prove
unsustainable, as regional economic activity will stay weak
once the initial boost from fiscal stimulus packages fades,
analysts have said this week.
The market rally is coming on the back of an
unprecedented amount of policy stimulus, Johanna Chua,
Citigroups chief Asia economist in Hong Kong, said.
But, even though Asian economies are seeing some signs of
stabilizing, we are still significantly below previous output
The MSCI Asia Pacific Index gained 1.9% this week and has now
rallied 12% in April the steepest monthly gain since
October 1998 while valuations are the highest since the bull
market of 2004. Investors have been buoyed by news this week of
better-than-expected economic data from the US and the 4.8%
monthly rise in South Koreas industrial production in
Chinas manufacturing purchasing managers index
(PMI) rose in April as fiscal stimulus boosts industrial
activity and triggers market confidence that the country can
power global growth.
But Jing Ulrich, head of China equities at JP Morgan, warned:
While a fifth monthly improvement in the PMI reinforces
our confidence that the Chinese economy is starting to turn
around, it appears sensible to guard against excessive
Analysts caution that Asian equities are rebounding against the
ominous backdrop of a recession-ravaged West, poor corporate
earning results expected later on in the year, and the threat
of a global swine flu pandemic.
Investors have brushed off the swine flu threat as an event
risk, which suggests that the market is now pricing in a
sustainable rebound in the global economy, said
Brian Jackson, senior Asia strategist at RBC.
Jackson says the rally has been fuelled by the excess cash on
the sidelines from the recent deleveraging cycle. But Asian
markets could be under abrupt selling pressure as
price-to-earnings ratios on the Asia MSCI now stands at 22x -
the highest level since March 2004.
Nevertheless, the liquidity rally could go on in the
near-term because money has to go somewhere, said
However, there is significant risk of a precipitous drop in
economic activity once companies finish restocking their
inventories, the immediate effect of government fiscal stimulus
wanes and if G7 markets stay effectively closed to Asian
Nevertheless, most analysts agree that Asian markets will
outperform the S&P 500 in a two to three-year horizon due
to the regions stronger relative growth prospects.
Asian markets have soared in the bull run, as investors
tactically allocated capital to the region to gain exposure to
the long-term structural shift in economic power from the West
to East. It is not clear there is sufficient risk appetite to
sustain the recent gains in Asian bourses and justify
relatively high current valuations, said analysts.