Goldman: Asian stock markets still in bear country

HONG KONG • Asia stocks are not out of the woods yet, despite the recent bear-market rally, according to Goldman Sachs Group Inc.

Investors who may be getting optimistic that markets across the region have bottomed should resist that notion, strategists led by Timothy Moe said in a note yesterday. The MSCI Asia-Pacific ex-Japan Index has rebounded some 12% since March 23, when it hit its lowest level since 2016.

“Bear market rallies are common,” the strategists said. “Market moves tend to be proportionate so large moves down often have sharp rebounds even if the bear market is not yet complete.”

Goldman economists now forecast the US economy to contract 6.2% this year, ushering in a deeper global recession. The effect on Asia is yet another cut to the firm’s 2020 earnings-per-share estimate for the Asia-Pacific ex-Japan benchmark, to a 22% drop from a 14% decline previously, with profits not seen recovering to their previous highs until 2022.

The 12-month target for the index is also trimmed to 470 from 475, implying an 8.5% gain from current levels. The gauge edged 1.2% higher yesterday, led by gains in Hong Kong and South Korea after the daily reported death toll in some of the world’s coronavirus epicentres dropped on Sunday.

Since 1970, the history of Asian bear markets shows that sharp rallies often occur, typically gaining as much as 15% and lasting as long as a month, Goldman said. Event-driven bear markets tend to be shorter and gains too, averaging 9% over 12 trading days.

The index’s 21% decline is a record for the first quarter and also leaves investors in murky territory.

In the past, there have been only six quarterly declines greater than 20% in the gauge’s history. In the following three months, the performance was split, with three gains and three losses.

To provide some clarity, Goldman has determined a set of conditions for identifying a true market trough:

• Stabilising or flattening virus infection curves.

• Visibility on the depth and duration of economic disruptions.

• Sufficiently large global stimulus.

• Mitigation of funding and liquidity stresses.

• Deep undervaluation of assets and position reduction.

• No intensification of other risks such as a dollar spike or lower oil prices.

The results so far are mixed, with some countries such as China seemingly further ahead than others like India and Indonesia, the strategists said.

“In short, as the global economy is just entering a steep decline, it seems too early to assert that equity markets have discounted all the negatives,” they wrote. — Bloomberg