Asian equities have kicked into overdrive in 2017 during the region’s largest rally in eight years, but a new batch of cautious investor sentiment reports signals that the market may be ready to pump the brakes and take profits.
State Street’s Asian Investor Confidence Index dipped in July for the eighth time in nine months, dropping to 96 from 97.3 on a scale where 100 indicates a neutral outlook. The measurement assesses the risk appetite of institutional investors in Asia. By contrast, the global reading jumped to 108.9 from 101 in June.
In another survey, BlackRock reported that just 49% of Hong Kong investors feel positive about their financial future in 2017, down from 58% in 2015 and 67% in 2014. Meanwhile, J.P. Morgan Asset Management announced in July that its investor confidence indicator in Hong Kong stagnated in the second quarter, despite a 6.9% gain during that time in the city’s benchmark Hang Seng Index. The reading edged down to 112 from 113 but still sits above the threshold for a positive outlook set at 100.
“The rather stagnant sentiment likely reflects the mix of optimism and uncertainty among investors, with many preferring to adopt a wait-and-see attitude,” said Karina Law, vice president of retail distribution at J.P. Morgan Asset Management.
Asian stocks were a must-buy earlier this year when they traded at steep discounts to US and European markets. There still appears to be fundamental support for the rally to continue as upward revisions to forward earnings outlooks in China and South Korea, for example, have outnumbered downward ones this year by the largest ratio in more than five years, according to Yardeni Research. Investors may be growing skittish, however, after already raking in significant gains.
“The rather stagnant sentiment likely reflects the mix of optimism and uncertainty among investors, with many preferring to adopt a wait-and-see attitude”
The MSCI AC Asia Pacific Index has surged 19.5% so far this year through August 2, set for its best yearly performance since registering a 37.9% gain in 2009. The run-up in 2017 comes after three years of muted performance in the benchmark, which measures stocks in 14 countries including Japan, China, Hong Kong and South Korea. With much of the low-hanging fruit now snapped up, however, Russell Investments is neutral on the region.
“The strong year-to-date performance in 2017 has made valuations less attractive and, in our view, pushed the region into overbought territory,” Russell Investments strategists including Graham Harman wrote in a June report.
The MSCI AC Asia Pacific Index was valued at around 1.6 times book value through June versus 1.4 times in December. The benchmark is still discounted versus other regions, however. It traded at 13.7 times forward earnings compared with the MSCI World Index at 16.5 times and the MSCI USA Index at 18.1 times.
Less than three in ten of the investors polled in the J.P. Morgan Asset Management survey planned to increase their investments. Perhaps signaling a more defensive mindset, one in three expressed an interest in income investments, up from just one in four the previous quarter.
In addition to creeping valuations, investors may also be concerned about the impact of a declining US dollar on emerging markets in the region that still rely on exports. The Bloomberg Dollar Spot Index, which measures the greenback against a basket of other currencies, dropped to a 15-month low on Wednesday.
Upbeat economic reports suggest the region has still been able to find a market for its goods, however, despite them being relatively more expensive in US dollar terms. South Korea recorded a US$10.6 billion trade surplus in July, for example, after announcing exports surged 20% from the previous year. Meanwhile, the Caixin China General Manufacturing Purchasing Managers’ Index increased in July for the second straight month as the rate of new order growth reached a five-month high.
The resurgence in trade has paid dividends for the region’s manufacturers and exporters. Hyundai Heavy Industries, the world’s largest shipbuilder, reported a 69.3% increase in first half operating income versus the same period in 2016. Its stock is up more than 20% this year at 177,500 won (US$157.38) through August 2. China’s home appliance maker, Midea Group, jumped 44.8% during that span to 40.80 yuan (US$6.06).
“We encourage investors to stay invested with a diversified approach, especially when interest rates remain low”
J.P. Morgan Asset Management’s Law said investors who cut and run from the market now might be leaving money on the table in the current economic environment. “Despite the uncertainties, we encourage investors to stay invested with a diversified approach, especially when interest rates remain low,” she said.
Further unwinding in the US dollar could also provide a tailwind for the rally in Asian stocks as investors look for new markets to invest in after selling off assets denominated in the greenback.
US-based funds that buy international stocks raised US$3.9 billion in the week ended July 26 versus just US$1 billion in funds focused on the domestic market, according to Investment Company data. The international funds have attracted more than US$150 billion so far this year, reversing a US$4.4 billion net sell-off in 2016.
This could translate to even higher trading interest in Hong Kong, for example, where daily turnover already breached the HK$100 billion mark on the first two trading sessions in August. Daily average turnover only topped HK$80 billion (US$10.2 billion) in February and March during the first-half of the year.