Value, not growth, key to 2013 Asia portfolios, HSBC research advises
HSBC Global Research anticipates East Asian equities will deliver a return of 15-20 per cent in 2013, driven by estimated earnings growth of 10-12 per cent across the region along with a re-rating of 4-55 per cent in share prices and an average dividend yield of 4 per cent.Asian equities can perform in a weak growth environment, against a backdrop of low valuations and rising expectations for an economic growth recovery, the research house said.
Consensus earnings estimates have stabilised for now and increasingly look as if they have bottomed out.
There is still uncertainty regarding global growth. Thus it's not just about positioning for cyclical growth, but also for a lower risk premium. This is why HSBC believe investors should construct portfolios with a bias to value instead of growth.
Besides preferring value to growth, its key themes are companies that can grow as their markets consolidate.
They also have margin power and effective cost controls, and also enjoy structural growth.
Compared with 12 months ago, a marked difference is that some issues are now much clearer. Part of the credit for this decline in risk goes to the central banks in Europe and the US, which have removed the major tail risks from equities by rolling out various easing policies. Japan could join the club if it changes its monetary stance in April.
Regionally, the fog surrounding Asian earnings forecasts is slowly clearing.
Purchasing Managers' Index readings suggest that the Chinese economy is slowly recovering, so risks to corporate earnings in that country are also on the decline. Some serious risks remain.
The research house has written about the low quality of Chinese earnings and onshore cash-flow issues.
"However, consensus 2012 estimates have declined to levels where we believe analysts might have become too conservative. As a result, earnings estimates have, for now, stabilised.
"When it comes to earnings estimates, it increasingly looks as if they have reached a bottom."
This is illustrated by three- and six-month earnings momentum. Analysts have not cut numbers for some months now and, as visibility has improved, the premium for visibility has declined. Market volatility has already declined in recent months.
In East Asia, however, stocks that have traded at high multiples are not necessarily those that have offered the highest growth, but those that could provide earnings visibility and reliability.
"Value versus visibility" would thus have been a more appropriate way to characterise the right approach.
In 2012, Asia growth outperformed Asia value. This shift in markets from growth to value has already started.
The analysis of mutual-fund positioning across East Asia also suggests that money is being taken from stable markets such as Singapore and reallocated to markets such as Taiwan.
A similar move from consumer staples into consumer discretionary is taking place.
Investors have scaled back their weights in the Philippines, a growth market, and recently added to Taiwan, the research house added.