Bullish Calls Increase as Asian Stocks Tear in the New Year

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(Bloomberg) — From trading firms to Wall Street analysts, this year sees more and more positive news for Asian equities as the outlook for earnings, valuations and flows all point upwards.

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The rally since late October has sent the MSCI Asia Pacific Index up nearly 23%, making it the most outperformer of the US benchmark since 1993, while also outperforming its European counterpart. The dominant driver has been China’s reopening, with a weakening dollar providing an additional boost as investors look for recession-proof markets.

Heading for the best start to a year since 2012, the MSCI Asia gauge rose 7.2% in January. The rally has many months to go, according to a survey of fund managers by Bank of America Corp. China’s growth prospects are being upgraded rapidly, which is a boon for the region’s economies, while earnings expectations are also rising in contrast to the downward revisions in Europe and the US.

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With concerns over the recession in the developed world, “the prospect of Chinese authorities supporting domestic growth has made both Chinese and broad Asian assets more attractive to global investors,” said Gary Dugan, chief executive officer of the Global CIO Office, a asset manager and financial consultancy. “We have increased our weightings in Asia and see that this can deliver results for many months.”

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China has been the focus of the Asia rally, with the MSCI China Index up more than 50% since late October. But there is also optimism. Benchmarks in the Philippines and Vietnam have entered bull markets this month, while Taiwan is closing in on the milestone.

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BofA’s Asia Fund Manager Survey found that 95% of investors expect stocks in Asia Pacific, excluding Japan, to rise over the next 12 months, with about half expecting double-digit gains. Most fund managers are “unabashedly bullish on China,” it added.

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Currents reflect the change of the seismic picture. In January alone, foreigners bought $16.5 billion worth of Chinese equities in mainland China, the largest monthly inflow ever recorded. They also deposited $3.3 billion in South Korea and $4.5 billion in Taiwan.

Even with the rally, Asian valuations don’t look strained. The region’s MSCI benchmark trades at 12.9 times forward earnings expectations, in line with the five-year median.

To be sure, an economic slump in the developed world could undermine some of the newfound optimism about Asia, especially for export-dependent markets like Korea. And with the Chinese economy back on track, there is a risk that inflationary pressures will be fueled, allowing central banks to remain aggressive for longer.

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Meanwhile, revenues paint a promising picture. According to data from Bloomberg, 12-month forward earnings estimates for the MSCI Asia benchmark are up about 6% since the end of October, compared to a decline of at least 1% each for the indicators representing the US and Europe.

“There is not a single economy in Asia that is at risk of recession,” Bernstein strategists led by Sarah McCarthy wrote earlier this month. “Based on a 12-month horizon, we expect Asian equities to close 2023 on a positive note.”

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