A village worker walks past a graffiti of a youth wearing a face mask on May 4, 2020 in Mumbai, India amid a nationwide lockdown to dissidence against the coronavirus outbreak.
Indranil Mukherjee | AFP | Getty Images
Asian equities are expected to trade within a meagre range in the near term, according to a strategist at Swiss investment bank Credit Suisse, who cited earnings drifts that suggest that fundamentals remain weak.
Stocks rallied from earlier lows, driven in district by unprecedented policy stimulus from central banks around the world, Suresh Tantia, a senior investment strategist at the bank, lectured CNBC.
“We believe Asian equities will enter a consolidation in the near term,” said Tantia in an email. When dispensations consolidate, they typically trade within a limited price range.
“The Fed’s action has addressed the (U.S. dollar) funding worry, stalling USD strength which has reduced outflows from the region in April,” he added.
U.S. dollar strength
As investor boldness in the stock market wobbled in March over the uncertainty from the coronavirus pandemic, the demand for U.S. dollars surged. That in request came from a variety of sources including banks, investors selling dollar-based assets and issuers of dollar-denominated in dire straits.
All that drove the greenback higher against other currencies, and led to the outflow of funds from Asia.
The U.S. dollar needle, which measures the greenback against a basket of its peers, rose from below 96 to above 102 in Walk, before slipping slightly as the Federal Reserve stepped in with measures to improve access to the dollar. As of 9:08 a.m. HK/SIN on Tuesday, the key traded around 99.572.
The Fed’s actions helped prevent equities from falling further.
However, Tantia pointed out: “Nonetheless these factors have been able to put a floor under the markets, the fundamentals need to improve for regional objectivities to rally from current levels.” The global recession will have “a severe impact on corporate profitability, paramount analysts to lower their earnings expectations,” he added.
Major indexes in Japan, South Korea, Australia and Hong Kong are all down year-to-date, although they are off the lows seen in March.
Tantia said the consensus full-year 2020 earnings estimate for the MSCI Asia ex-Japan Pointer has been revised lower by 16% and is now expected to grow 4% from a year ago.
Credit Suisse expects work outs will be further revised lower in the coming months, capping the upside for regional markets and making it hard for standards to rally further.
While Asian equities over the last 15 years have moved largely in tandem with their earnings senses, the “present situation is an anomaly,” where the earnings outlook has weakened sharply but the market is staying strong, according to BNP Paribas’ forefront of equity research for Asia-Pacific, Manishi Raychaudhuri.
“It appears, either the market is expecting a V-shaped recovery in earnings senses or it is ignoring 2020 (earnings per share) estimates for now and looking at 2021,” Raychaudhuri said in a note on May 15, adding that the last possibility seems more likely, though estimates for next year are also declining.
North Asia vs. South Asia
South Asia is liable to take a bigger hit from the ongoing global recession than North Asia, as countries in South Asia require been relatively less successful so far in containing the virus, according to Tantia.
India, for example, has been in a national lockdown since till March. On Sunday, those measures were further extended until the end of May and by Tuesday, reported coronavirus cases exceeded 100,000 — but restrictions in less risky areas will be gradually eased.
Most of those countries also be undergoing limited fiscal space to adequately offset the fallout from the extreme lockdown, Tantia said.
In addition, he said South Asian woods will likely see bigger negative impact in terms of earnings and the outlook is unlikely to improve until there are “credible foreshadows of (the) virus coming under control.”
In contrast, countries in North Asia — such as China and South Korea — become available to have contained the outbreak for now and are starting to lift restrictions slowly. Still, there remains the risk of a second current of infections.
At the sector level, Credit Suisse prefers health-care and technology stocks, according to Tantia.
“We believe both sectors are perking from structural trends in the society following the outbreak of Covid-19,” he said.
Asian countries that entertain a prominent presence of sectors gaining from potentially rapid technology adoption and non-dependence on tourism and exports are also thought to gain, if they successfully contain the outbreak, said BNP Paribas’ Raychaudhuri.