Buy Asia Stocks Before ‘Green’ Light, Goldman Says

Date: Thursday, March 11, 2010
Author: Bloomberg

Investors should buy Asian stocks outside Japan after valuations dropped and before sentiment strengthens further, Goldman Sachs Group Inc. said.

“By the time all the lights turn green, the race will already be well under way,” Goldman Sachs analysts led by Timothy Moe wrote today. “Sentiment and valuation will improve as the year progresses, and we would prefer to be early.”

The MSCI Asia-Pacific excluding Japan Index remains 0.5 percent lower this year, having rebounded from year-to-date losses of as much as 9.7 percent. Stocks slid earlier this year on concern that China will tighten lending to combat faster inflation and that Greece’s debt crisis will spread.

Analysts’ earnings growth estimates for this year have climbed to 26 percent on average, near Goldman Sachs’s 30 percent forecast, according to the report. The most profitable securities firm in Wall Street history is predicting a 21 percent increase in Asian corporate earnings in 2011.

The MSCI index’s valuation has dropped to 14.4 times estimated earnings from as high as 29.3 times in November, after profit estimates were upgraded, according to weekly data compiled by Bloomberg.

“We view the risk/reward balance very positively from a strategic perspective,” the Goldman Sachs analysts wrote.

Yearend Forecasts

Still, the brokerage trimmed its December 2010 forecast for the MSCI Asia-Pacific excluding Japan Index to 530 from a November forecast of 540, and lowered its estimate for the MSCI Asia excluding Japan Index to 640 from 650. The MSCI Asia- Pacific gauge retreated 0.4 percent to 414.93 as of 11:10 a.m. in Singapore. The MSCI Asia measure lost 0.3 percent to 480.38.

Moe, the brokerage’s regional strategist, and his colleagues said on Nov. 30 slowing economic indicators and a rally from the March 2009 lows may result in “headwinds” for stock markets during the first half of 2010. The outlook for earnings growth and “positive” capital flows would nonetheless drive share-price gains for the year, they said.

Royal Bank of Scotland Group Plc strategist Emil Wolter is more cautious, saying on Feb. 25 Asian stocks outside Japan may fall 12 percent this year because valuations have become too expensive and as developed economies recover at a faster pace.

Stronger Potential

Russell Investments predicted this week Asian stocks may outperform European and U.S. markets over the next few months because of the region’s stronger potential for earnings growth.

“Asia is still the only growth area that’s sustainable,” said Bhaskar Laxminarayan, chief investment officer for Asia at Pictet & Cie, Switzerland’s largest closely held private bank. “We’ve pulled back a bit of our equities given the uncertainty that’s out there but these can be good opportunities to go back and buy.”

Goldman Sachs said it remains most optimistic on the outlook for stock markets in China, South Korea and Taiwan. Indexes tracking Chinese shares traded in Shanghai and Hong Kong and Taiwan’s Taiex index have retreated at least 5 percent this year, among the 10 worst performers globally. South Korea’s Kospi index has fallen 1.4 percent.