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Citigroup Favors North Asian Stocks as Exports Gain

North Asian stocks will rise faster this year than the rest of the region as a strengthening global economy boosts exports, according to Citigroup Inc.

Citigroup is recommending investors buy technology and industrial companies from China, South Korea and Taiwan, said Haren Shah, Singapore-based chief strategist for Asia-Pacific at the brokerage’s wealth management division, which oversees $210 billion. The bank also favors stocks in Japan, the U.S. and Europe, he said.

“There are signs of recovery in the global economy,” Shah said in an interview on Sept. 16. “Export-oriented economies in North Asia such as China, South Korea and Taiwan should do relatively better than Southeast Asian markets that are much more domestic-oriented economies.”

The Shanghai Composite Index (SHCOMP) climbed 4.5 percent this month through yesterday as data showed manufacturing output in the world’s second-largest economy accelerated to a 17-month high in August, while overseas shipments beat estimates. South Korea’s Kospi index advanced 4.1 percent, while Taiwan’s Taiex index gained 2.3 percent.

International money managers pumped $2 billion into South Korea last month, boosting the won by 1.2 percent, the biggest gain among Asian currencies, according to data compiled by Bloomberg. In contrast, foreign investors sold a net $2.2 billion of Thai, Indonesian and Philippine shares amid signs of slowing regional expansion and speculation that the U.S. would start tapering stimulus.

Fed Stimulus

The Federal Reserve yesterday unexpectedly refrained from reducing its $85 billion monthly bond buying program, saying it needs to see more signs of lasting improvement in the economy.

“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press conference in Washington after a two-day meeting of the Federal Open Market Committee. “The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”

Bernanke said a decision on tapering asset purchases depends on economic data, and there is no set timetable.

“Investors are beginning to realize tapering will only come if you see growth,” Shah said. “We’re moving away from a liquidity-driven to an earnings-driven market. The trend is heading in the right direction.”

Most Potential

Stock valuations in China and South Korea are cheap and these markets have the most upside potential in Asia, Shah said. The Shanghai Composite Index traded at 9.6 times estimated earnings as of Sept. 17, compared with 10 times for the Kospi index, 15.4 times for Standard & Poor’s 500 Index and 13.5 times for the MSCI Asia Pacific Index, according to data compiled by Bloomberg.

Chinese shares will advance more than other markets in Asia given their low valuations and as the government retools the economy to rely more on consumption and less on exports and investment, Shah said. China’s Communist Party will review economic policy in November.

The Beijing plenary meeting of the party’s Central Committee, which includes President Xi Jinping, Premier Li Keqiang, government ministers and the heads of the biggest state-owned enterprises and banks, will discuss extending reforms, the state-run Xinhua News Agency reported last month.

Bull Market

“Everybody will be watching the plenary session in November where they’re going to put in a lot of economic reforms for the next few years,” Shah said. “If all the right noises are made and we continue to see improvements in the economy and signs of stability in the banking system, then Hong Kong and China can continue to rally.”

Hong Kong’s Hang Seng China Enterprises Index (HSCEI) of mainland shares traded in the city entered a bull market last week after rebounding more than 20 percent from a June low, while the benchmark Hang Seng Index erased its 2013 loss.

A recovery in China and the U.S. will also benefit South Korea, Shah said. China accounts for about 26 percent of the country’s exports, with the U.S. buying 10 percent, according to data compiled by Bloomberg. Samsung Electronics Co. (005930), the nation’s biggest shipper of consumer electronics, gets about 20 percent of sales from mainland China and 22 percent from America, the data show.

“We’re quite optimistic about South Korea,” Shah said. “It’s one of the cheapest right now and their exports are improving. If the U.S. and China continues to recover, they will be the prime beneficiary.”

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net

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