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Look to North Asia for next leg of bull market

THE LACKLUSTRE START to the year on a weaker-than-expected job report in the United States, concern over the failure of an investment trust in China, and pressure on emerging-market currencies has caused investors to question their outlook for global equities.

But these negative factors will prove short-lived.

The soft patch in US economic data is largely attributable to the severe cold wave. Temperatures in North America fell to unprecedented levels this winter, causing economic activities to slow down.

The emerging-markets situations started to stabilise as central banks stepped in to stem currency woes. For example, the Central Bank of the Republic of Turkey raised its key interest rate to slow fund outflows.

In China, a disorderly default on a 3-billion-yuan (Bt16 billion) high-yield product has been averted as China Credit Trust and other parties involved have reached an agreement to pay back 100 per cent of the principal plus 3 per cent interest on the loan.

In the medium term, my bullish view on equities remains intact amid sustained recovery of the G3 economies (the US, Japan and the European Union). Asia could benefit from increased exports as demand from major economies recovers.

In particular, North Asian economies such as Taiwan, South Korea and mainland China, which are deeply integrated with the global supply chain of smartphones and tablets, products that are in high demand, could gain greater leverage. With a better export outlook, North Asia's economic growth this year will likely outpace other regions. In addition, the improved export outlook will help sustain current-account surpluses, which will help limit risk of fund outflows.

A valuation gap will eventually attract fund flows to North Asia. In the past year, price-to-earnings multiples expanded in developed markets amid economic optimism, while P/E contracted in emerging markets because of fears over tapering of the US quantitative easing programme. This resulted in the valuation gap between developed and emerging markets widening to an eight-year high.

Above-average price-to-earnings and price-to-book multiples after the rally limit further upside to single digits in most developed-market equities (except Japanese), in our view, while North Asia upside potential is more open.

We see much larger upside potential in the Japanese and North Asian stock markets due to strong economic fundamentals and attractive valuations, and advise investors to use this market correction as an opportunity to buy.

Komsorn Prakobphol is a senior investment strategist at the Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com |or komsorn@tisco.co.th.


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