Supported by the following factors, the optimism of Asian stocks’ profit recovery has strengthened
1. US-China trade tensions may ease; 2. Optimism about the improvement of the global electronics product cycle; 3. Expectations of low interest rates under fiscal stimulus measures; 4. Low cardinality effect. We believe that the focus will shift from this year’s defensive stance to a more balanced attitude in 2020. This year’s rally has increased the 12-month forecast price-earnings ratio in Asia (excluding Japan) to 13.63 times, which is higher than one standard deviation in 10 years. We believe that Asian stocks can maintain above-average P / E valuations as earnings recover and valuations relative to global equities. Singapore, Hong Kong / Mainland China, and the Philippines are attractive in Asian regions other than Japan. The stock values of these countries are lower than their average 12-month projected price-earnings valuation within 10 years. Singapore, Hong Kong and state-owned enterprise indexes also provided the highest returns of at least 4% for fiscal year 2020. China’s A-shares have the lowest price-to-earnings ratio, followed by the Philippines and H-shares. As a small and open economy, Singapore will benefit from the rebound in global demand for electronics and the steady adjustment of China-US trade tariffs.
With a cumulative surplus of about S $ 15.6 billion, Singapore should also benefit from an expanding budget next year
These factors, coupled with inexpensive price-to-earnings valuations, high single-digit EPS growth, 4.2% high dividend yield and its defensive characteristics, should trigger capital inflows into the Singapore market and drive upward price-earnings ratios. We use a “barbell strategy” to balance room care / defensive and early to mid-term cyclical recovery risks.
As Hong Kong’s economy is expected to emerge from the recession next year, and GDP will grow by 1.5% year-on-year, it should benefit from a low base effect comparison
For China, we believe that the support of infrastructure, tax cuts and loose monetary policy is to ease the weak growth prospects. Although recent uncertainty in Hong Kong has severely affected the retail and tourism industries, the local exposure of the stock market is not high. We believe that the results of the China-US “Phase 1” transaction will give greater impetus to the future of the Hong Kong market. Defensive stocks are a bit overdone, and if current uncertainty improves, investors must seek more cyclical stock markets to supplement their exposure. We see that the Hang Seng Index and the State-owned Enterprise Index will perform better next year, thanks to their attractive price-earnings ratio and yield. We prefer industries with Chinese operations in education, real estate, catering and insurance, while avoiding Hong Kong banks and consumer discretionary products.