What’s wrong with Asian stocks? Theories from Goldman and others

Maybank Kim Eng says investors should look beyond short-term noise and focus on region’s long-term growth prospects

It’s been a tumultuous two weeks for equity traders in Asia. And at some point, it just gets to be too much — strategists from Goldman Sachs Group Inc to Morgan Stanley have begun slashing their forecasts.

They’ve had to wrestle with a rapidly escalating trade war between the US and China, a US Federal Reserve rate hike, the inconclusive Singapore summit between US President Donald Trump and North Korea’s Kim Jong-un, and even a series of hacks at South Korean crypto exchanges buffeting digital currencies.

The MSCI Asia Pacific Index of stocks slid further last Friday, eclipsing a 10% loss from its January peak to erase annual gains and fall to its lowest level this year.

Markets across the region are nearing some dubious milestones, with Shanghai heading into a bear market to join Vietnam and the Philippines, while Singapore also approaches a 10% correction.

Here’s a look at the issues facing some of the key markets in the region as investors and analysts inch closer to waving the white flag on 2018.

Asia Pacific

Goldman is starting to back off its long-time bullish call on Asian stocks, paring its 12-month target for the MSCI Asia Pacific excluding Japan Index last Thursday to 625 from 640.

US-China trade tensions have escalated against an unfavourable macro backdrop, with global growth slowing amid tighter US monetary policy and a strengthening dollar, strategists led by Timothy Moe wrote in a report dated last Thursday.

Goldman’s not quite ready to bail out completely, however — its target implied gains of about 14% from current levels.

Meanwhile, strategists at UBS Group AG see Asian stock markets pricing in a one-in- five chance of a more serious trade war causing an earnings recession.

A full-fledged trade war could see stocks in Asia tumble 30% from this year’s peak, they said.

Hong Kong

Don’t count on a rebound in Hong Kong stocks any time soon either, according to strategists at Morgan Stanley, who slashed their 12-month target for the Hang Seng Index by about 10% last week.

The new forecast implied a slump of 18% from the gauge’s January peak, nearing the 20% correction commonly associated with a bear market.

“The Hang Seng Index is at risk of a further sharp draw- down near term,” Morgan Stanley strategists led by Jonathan Garner wrote in a note last Wednesday.

Hong Kong is especially vulnerable to volatility in the US and China given that its currency is pegged to the dollar and therefore tied to US monetary policy, while many of its companies depend on China for their earnings.


The outlook is no better in China, with the benchmark Shanghai Composite Index headed into a bear market with losses from its January peak at 20%.

The index is at its lowest since June 2016 and is one of the world’s worst performers this year, coinciding with Beijing’s deleveraging campaign.

Morgan Stanley strategists now forecast the CSI 300 Index to fall into a bear market that will last for the next year.

Alongside the standard emerging-market and trade-war pessimism, deteriorating liquidity conditions in China and a weaker yuan will also weigh on stocks, they said.

China International Capital Corp Ltd, meanwhile, slashed its year-end estimate for the Hang Seng China Enterprises Index to 14,000 from 16,000 as company multiples are unlikely to expand as much as previously thought due to tighter liquidity conditions both at home and globally.


Asia’s worst-performing equity index this year, which entered a bear market last Thursday after a 22% drop from its January peak, won’t be able to pull out of its own swoon unless the Philippine central bank does more to help the stock market recover, according to the nation’s biggest money manager.

Fritz Ocampo, who manages about US$19 billion (RM76.08 billion) as CIO of BDO Unibank Inc in Makati, said the central bank’s second interest-rate hike this year isn’t enough to fully arrest the peso’s slide.

“We may have not seen the bottom yet,” Ocampo said.


Meanwhile, a stunning May election that ended six decades of rule by the same party has led to even more selling in Malaysia, with stocks plunging for a 10th straight day.

Investors adjusting to a new prime minister seeking to shore up the nation’s debt have fled the market, while analysts have cut earnings forecasts so much that Malaysia has overtaken South Korea as the Asia-Pacific market with the biggest downgrades in profit projections this year.

“The short-term outlook for Malaysian equities will remain tough as the new government is trying to find out the depth of the financial issues,” said Christopher Wong, senior investment manager for Standard Life Investments in Singapore.

What’s Next?

While the bears are plenty, Maybank Kim Eng strikes a more optimistic tone. Investors should look beyond the short-term noise and focus on the region’s long-term growth prospects, John Chong, head of the investment-banking arm of Maybank said at its Invest Asia UK conference in London.

“Asia is now better positioned to weather the volatility,” he said. “We believe investors will see real value emerging in Asian corporates after the recent market tantrums and should capitalise on the opportunity.” — Bloomberg