Asia's World-Beating Equity Rally Is Just Beginning, SocGen Says

Sep 14, 2017 4:48 am ET

(Bloomberg) -- Global stocks have been climbing to all-time highs but they still trail behind Asian equities this year. Societe Generale says the outperformance has only just begun.

This view is based on three factors -- earnings dynamics, reasonable valuations and ample liquidity, analysts led by Frank Benzimra, head of Asia equity strategy, wrote in a Sept. 14 report.

“The earnings growth recovery, caused by trade growth, China’s economic momentum and a weaker U.S. dollar, continues and is driving markets,” they said. Still, they note three risks that could blow the Asia rally off course:

  • A dollar rebound -- a large part of the year-to-date outperformance stems from a weak greenback.
  • Continuing tensions over North Korea.
  • A new economic regime after China’s upcoming Communist Party National Congress.

The analysts said there’s low probability of military conflict on the Korean peninsula. A more likely outcome is heightened commercial friction between South Korea and China, as further provocations by Pyongyang would result in closer military ties between Seoul and the U.S.

On China, the authors said the leadership reshuffle at the congress could result in an acceleration of the financial deleveraging that is already well under way.

“This is certainly among the most destabilising of elements for markets,” they said. However, a scenario in which President Xi Jinping cements his authority at the congress would open up political space for faster reforms -- a positive for markets.

Read more: Xi Jinping -- the most powerful Chinese leader in decades.

India is a strategic buy after the reforms introduced by Prime Minister Narendra Modi, the analysts said, dubbing it a “buy-on-dip” market. They said the case for Asean is becoming “increasingly compelling,” and single out Thailand as their favorite market there.

One exception to the Asia rally story is Japan, where stocks have trailed despite corporate earnings being at an all-time high. However, Societe Generale sees the country as a long-term value proposition, and in the short term is focusing on sectors linked to domestic business investments.

Outside Japan, the analysts see financials emerging as a driving force for equities in many countries. “Earnings in domestic sectors in general and the financial sector in particular are just starting to become positive contributors to growth,” they said.

©2017 Bloomberg L.P.