A municipal worker walks past a graffiti of a youth wearing a face mask on May 4, 2020 in Mumbai, India amid a nationwide lockdown to fight against the coronavirus outbreak.
Indranil Mukherjee | AFP | Getty Images
Asian equities are expected to trade within a limited range in the near term, according to a strategist at Swiss investment bank Credit Suisse, who cited earnings trends that suggest that fundamentals remain weak.
Stocks rallied from earlier lows, driven in part by unprecedented policy stimulus from central banks around the world, Suresh Tantia, a senior investment strategist at the bank, told CNBC.
“We believe Asian equities will enter a consolidation in the near term,” said Tantia in an email. When shares consolidate, they typically trade within a limited price range.
“The Fed’s action has addressed the (U.S. dollar) funding stress, stalling USD strength which has reduced outflows from the region in April,” he added.
U.S. dollar strength
As investor confidence in the stock market wobbled in March over the uncertainty from the coronavirus pandemic, the demand for U.S. dollars surged. That demand came from a variety of sources including banks, investors selling dollar-based assets and issuers of dollar-denominated debt.
All that drove the greenback higher against other currencies, and led to the outflow of funds from Asia.
The U.S. dollar index, which measures the greenback against a basket of its peers, rose from below 96 to above 102 in March, before slipping slightly as the Federal Reserve stepped in with measures to improve access to the dollar. As of 9:08 a.m. HK/SIN on Tuesday, the index traded around 99.572.
The Fed’s actions helped prevent equities from falling further.
However, Tantia pointed out: “Though these factors have been able to put a floor under the markets, the fundamentals need to improve for regional equities to rally from current levels.” The global recession will have “a severe impact on corporate profitability, leading analysts to lower their earnings expectations,” he added.
Major indexes in Japan, South Korea, Australia and Hong Kong are all down year-to-date, though they are off the lows seen in March.
Tantia said the consensus full-year 2020 earnings estimate for the MSCI Asia ex-Japan Index has been revised lower by 16% and is now expected to grow 4% from a year ago.
Credit Suisse expects estimates will be further revised lower in the coming months, capping the upside for regional markets and making it hard for stocks to rally further.
While Asian equities over the last 15 years have moved largely in tandem with their earnings estimates, the “present situation is an anomaly,” where the earnings outlook has weakened sharply but the market is staying strong, according to BNP Paribas’ head of equity research for Asia-Pacific, Manishi Raychaudhuri.
“It appears, either the market is expecting a V-shaped recovery in earnings estimates or it is ignoring 2020 (earnings per share) estimates for now and looking at 2021,” Raychaudhuri said in a note on May 15, adding that the latter possibility seems more likely, though estimates for next year are also declining.
North Asia vs. South Asia
South Asia is likely to take a bigger hit from the ongoing global recession than North Asia, as countries in South Asia have been relatively less successful so far in containing the virus, according to Tantia.
India, for example, has been in a national lockdown since late March. On Sunday, those measures were further extended until the end of May and by Tuesday, reported coronavirus cases topped 100,000 — but restrictions in less risky areas will be gradually eased.
Most of those countries also have limited fiscal space to adequately offset the fallout from the extreme lockdown, Tantia said.
In addition, he said South Asian countries will likely see bigger negative impact in terms of earnings and the outlook is unlikely to improve until there are “credible signs of (the) virus coming under control.”
In contrast, countries in North Asia — such as China and South Korea — appear to have contained the outbreak for now and are starting to lift restrictions slowly. Still, there remains the risk of a second wave of infections.
At the sector level, Credit Suisse prefers health-care and technology stocks, according to Tantia.
“We believe both sectors are benefiting from structural trends in the society following the outbreak of Covid-19,” he said.
Asian countries that have a prominent presence of sectors gaining from potentially rapid technology adoption and non-dependence on tourism and exports are also expected to gain, if they successfully contain the outbreak, said BNP Paribas’ Raychaudhuri.