“Expectations are running high” in Asia, says Citigroup. As the MSCI Asia ex-Japan index has soared, analysts have been upgrading earnings forecasts. Its aggregate earnings per share were expected to contract by 11% in 2009 a few months ago.
But now the forecast is for a mere –2%, followed by a 30% jump in 2010. Throw in the fact that the market has already risen to its 30-year average valuation of 1.7 times book value, and companies “had better deliver” the V-shaped recovery the market expects: “there is no room for disappointment”.
Yet disappointments are all too likely. Singapore provided some cheer last week as GDP bounced by an annualised 20% in the second quarter, but “this was a weak light at the end of an extremely long tunnel”, as Janet McFarland puts it in Canada’s Globe and Mail. Growth was still almost 4% down year-on-year.
With demand in the US and Europe likely to be subdued for some time, strong rises in Asian GDP based on inventories being rebuilt are set to fade, says Capital Economics. “Neither internal nor external demand” has improved enough “to give us a V”, says Citigroup. On the export front – 69% of the Asian economy – the year-on-year declines are just becoming less negative.
So, the overall earnings prediction “looks a long shot”. China has juiced up its growth by boosting bank lending, but this just postpones a slowdown – it still depends on exports and western demand is unlikely to recover soon, says Saxo Bank. All in all, investors in Asian markets look set for a rocky ride.