Asian equities may be at record highs but analysts see earnings season, which gets under way this week, providing a further boost.
Profit estimates for all Asian stock sectors were increased over the last three months of 2017, with cyclical shares seeing the steepest upgrades from analysts, according to data compiled by Bloomberg.
Companies that tend to track economic and business cycles — from technology and energy to consumer and industrials — had their profit estimates lifted an average 5 percent by analysts, the data show. That compares with an increase of 4.4 percent for the wider MSCI Asia Pacific Index.
The strong outlook for cyclicals is a positive sign for the broader Asian market, as those stocks make up the bulk of the Asia Pacific benchmark. It’s also an indication analysts are bullish on the global economy.
“A recovery in cyclicals tells you that global trade is strengthening and feeding through to domestic demand,” said Sanjay Mathur, chief economist at Australia & New Zealand Banking Group Ltd. in Singapore. That “in turn is raising demand for investment goods.”
Taiwan’s technology stocks dominate the upgrades, followed by energy equities in Japan and Hong Kong. Taiwan’s HTC Corp., India’s Petronet LNG Ltd., China Oilfield Services Ltd. and Meitu Inc., a Chinese mobile app company, are among the stocks that saw highest positive profit revisions.
Earnings releases for the fourth quarter really get going on Tuesday, when Korean smartphone titan Samsung Electronics Co. reports. The company is projected to post a 25 percent increase in adjusted net income for the fourth quarter, analysts’ estimates compiled by Bloomberg show.
A slew of Japanese retailers and manufacturers — from Aeon Co. and FamilyMart UNY Holdings Co. to Disco Corp. — also release earnings this week. Indusind Bank Ltd. kicks off the Indian earnings season with its third-quarter results due Thursday.
While Asian stocks have been powering ahead, their relative cheapness, coupled with the strong growth fundamentals in the region, mean the gains of 2017 — when the MSCI Asia Pacific gauge jumped 29 percent, the most since 2009 — should continue, says Han-Piow Liew, head of equity derivatives at Tolaram Group’s family office, which manages over $500 million in assets.
Asian shares have a price-to-earnings ratio of 16.5, compared with valuations of more than 20 for the MSCI Europe, S&P 500 and MSCI All-Country World indexes.
That said, “key risks to this view would be a surprise increase in the speed of rate hikes and a faster than expected shrinking of monetary supply in the U.S. which may spur outflows” from Asian stocks, Liew said.