Asian EMERGING MARKET equities seen bouncing along bottom as uncertainty reigns

September 13, 2015

Singapore (Sept 14)  Asian emerging market stocks have fallen so far in the recent rout that a turnaround would normally be imminent by historical measures, yet few investors believe it will happen anytime soon.

The MSCI Asia ex-Japan index has slumped 24 percent since its April peak - sufficient, historically, to entice back investors - but a range of uncertainties is keeping them sidelined.

These uncertainties include the timing of the Federal Reserve's rate increase; China's slowing economy, slumping stock market and currency devaluation; and the U.S. dollar's strength.

A sophisticated investor can measure and take advantage of market volatility, but uncertainty fosters indecision.

"Volatility going up is not a bad thing because you're going to make money if you're right," said Olivier d'Assier, Asia-Pacific managing director at investment risk-management firm Axioma in Singapore. "But with uncertainty, you can't quantify it."

Many investors believe emerging Asian stocks, excluding China, are experiencing corrections - a drop of 10 percent to 20 percent from their peak - but they are not yet bear markets either: marking downturns of more than 20 percent lasting at least 60 days.


It is risk aversion amid uncertainty, rather than companies' actual performance, that has driven the sell-off, d'Assier said.

The MSCI benchmark is trading at 1.4 times book value, its lowest in nearly three years, as foreign investors have fled emerging markets including South Korea, Indonesia and Thailand. In past corrections, these levels have indicated a bottom, drawing investors back.

Cash made up 3.8 percent of Asia ex-Japan equity portfolios at the end of July, a six-year high, according to fund-flow tracker EPFR Global.

Asia ex-Japan holdings fell to 5.8 percent of global equity portfolios in August, from 7.2 percent in July, and bond allocations in global balanced portfolios rose to an 8-month high, a Reuters survey showed.

Without the uncertainty, "the turnaround would be much faster," said Wilfred Son Keng Po, Asia ex-Japan equities portfolio manager at PineBridge Investments in Hong Kong. "The contagion effect isn't sparing any Asian emerging market."


That contagion effect has led the level of correlation between Asian stock markets to quadruple over the past four months, according to Axioma, meaning that the benefit of spreading risk by diversification is reduced.

Even investors who hold multiple asset classes see the decline in diversification driving them to sell out of all their riskier assets for cash.

Emerging markets investor FMG has increased cash to 20-40 percent of its portfolio since June by selling stocks, compared with 5 percent normally, fund manager Arild Johansen said.

Value strategies - investing in stocks that appear underpriced - have outperformed recently, showing bargain hunters are returning, d'Assier said.


An Australia-based fund manager, who has also remained sidelined, is preparing a list of opportunities. Korea and Taiwan look attractive, on valuations and exports, he said.

Correlation has stabilised, d'Assier noted, but to get a sharp-enough reduction in correlation between markets to drive a recovery would first demand a much greater level of investor confidence.

A good start would be getting the U.S.'s first rate hike since 2006 over with when the Fed meets Sept. 16 to 17.

Corporate results season in October, d'Assier added, will also offer clarity on winners and losers, giving investors buying options, and help boost portfolio diversification.

"In any correction, one should always look at the investment landscape and assess what works best," said PineBridge's Son Keng Po. "Opportunities for some stocks are starting to emerge."

SOURCE: Reuters

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