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Value rotation may keep emerging bourses buoyant

Since the first quarter, two notable trends have emerged in global stock markets.

First, in developed markets, especially in the US, there has been a major sell-off in popular high-growth stocks such as those in the Internet and biotech industries, which had been leading the broad market index in the past year and were trading at historically high price to earnings ratios.

Traditional big caps, such as energy and consumer staple stocks that were trading at cheaper valuations, were catching up.

A similar trend has been observed at the country level where cheaper emerging market stocks have been outperforming their more expensive counterparts in the developed world.

Fund flows have returned to emerging market equity funds in the past few weeks after 14 weeks of outflows. These value rotation trends indicate investors' growing interest in sectors and countries with cheap valuations.

In my view, global stock markets are at the inflection point where expensive valuations are limiting upside in the West (US and European stock markets) and cheap valuations in emerging markets are starting to draw fund flows from abroad.

Unfortunately, the Thai stock market is not cheap. The SET Index is trading at 13.5 times P/E, 10 per cent more expensive than its Asian peers. And with the political conflict unresolved, its economic outlook is not so great either.

North Asia could stand to benefit most from this trend, as its economic outlook is starting to improve. Monthly export data from South Korea, Taiwan and China suggest a strong rebound amid growing demand from developed nations after this year's weak start due to the unusually cold winter in the US.

With a better export outlook, North Asia's economic growth will likely outpace other regions for the rest of the year. And with cheap valuations, stock markets in these countries could do very well too.

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


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