Earnings surprises to underpin bargain hunting in Asia

Asian countries have had a challenging year. The economic disruption caused by the Covid-19 pandemic has impacted the region’s growth. Asia’s growth forecast for 2021 has been revised down to 6.5% by the IMF, compared with its April forecast for a 7.6% expansion. The overall outlook remains mixed with economies recovering at different speeds.

But there are reasons to be positive. Vaccination rates have picked up significantly across the region which should lead to a domestic services recovery. Meanwhile the region has benefitted from external trade because of strong global demand for goods. Multiple macro indicators are also pointing to a thaw in supply chains with the backlogs between the US and Asia reversing in recent weeks. As for inflation, it has remained benign due to repeated rounds of lockdowns, which have crimped domestic demand. Most central banks in the region are likely to stay on hold longer to support the fledgling recovery in the region.

Turning to financial markets, Asian equity markets have underperformed Europe and US markets for the year to date.

But for investors looking at a potential mean reversion, Asia appears to be a great place to start bargain hunting, as the bad news may be bottoming out. More than 68% of the companies in the region reported positive third quarter earnings surprises. Most markets too reported net positive surprises; the exceptions being the Philippines, China, Malaysia and Thailand. As expected, earnings growth of export-oriented companies far outpaced that of domestic-oriented companies.

Tech-dominant markets like Taiwan and Korea showcased some of the more positive earnings beats. Many investors have mistaken a mild inventory correction with a cyclical downturn and have sold out of the technology sector, though we expect digital penetration to continue to grow, supported by higher technology components demand from digitalisation, electric vehicles, and cloud computing trends. With recent share price corrections, we see the semiconductor industry offering outsized returns and dividend yields. On the whole, we remain optimistic on Asia especially given its current valuations from both a price-to-earnings and price-to-book basis.

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Source: the BLOOMBERG PROFESSIONALTM service, Factset, MSCL, Credit Suisse

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