Strategists at three of the world’s biggest banks are advising investors to buy Asian equities most tied to economic growth after valuations fell and the global economy showed signs of recovery.
Technology, industrial and materials stocks will climb next year as China’s expansion accelerates and concern about the U.S. fiscal cliff fades, Niall MacLeod, a strategist at UBS AG, wrote in a report today. Valuations for cyclical shares are about 40 percent lower than defensive equities, including household-products makers, according to a Nov. 26 note by Morgan Stanley’s Jonathan Garner. An improving earnings outlook will help lure investors, Citigroup Inc.’s Markus Rosgen wrote on Nov. 26.
The recommendations reflect growing confidence in the global economy as data in the past week signaled a rebound in Chinese manufacturing and an improving U.S. housing market. The MSCI Asia Pacific Index rose for five straight days through yesterday, bringing its gain this year to 8.7 percent. The gauge may climb another 18 percent through the end of 2013, according to MacLeod’s report.
“We expect cyclical conditions to improve, driven by the removal of U.S. uncertainty, stabilizing exports to Europe and the end of inventory adjustments in China,” Hong Kong-based MacLeod wrote. “Tactically our biggest call is to be overweight cyclical sectors over defensives.”
The MSCI Asia Pacific Index dropped 0.6 percent to 123.01 as of 4:28 p.m. in Hong Kong amid concern U.S. lawmakers have made little progress in talks to avert spending cuts and tax increases.
Analysts are turning less bearish on the earnings outlook for cyclical companies relative to defensive businesses, whose profits are less reliant on an expanding economy, according to Rosgen, a Hong Hong-based strategist at Citigroup.
“This will serve to increase the confidence of investors to have another look at the whole cyclical and financial space,” Rosgen wrote in his report this week.
China, the most important economy for cyclical companies, may expand 8.2 percent next year, up from 7.7 percent in 2012, wrote Garner, the chief Asia and emerging market strategist at Morgan Stanley. The bank prefers “cheap” industries such as energy and capital goods.
The MSCI Asia Pacific index may advance to 146 next year, compared with 123.71 at yesterday’s close, UBS’s MacLeod said. The gauge last traded at 146 in June 2008, before the collapse of Lehman Brothers Holdings Inc. helped spark the global financial crisis.
Stocks in the Asia Pacific measure may trade at 12.2 times 2013 earnings estimates, MacLeod wrote. The index is currently valued at 11.6 times, compared with the five-year average of 13, according to data compiled by Bloomberg.
UBS advised investors to hold more shares in South Korea, China and India than are represented in benchmark indexes.
“We favor Korea and China for their exposure to global and regional cyclical improvement,” MacLeod said. “We are also overweight India, one of the few markets where we expect monetary easing to continue next year and a structural return on earnings improvement.”
India’s inflation unexpectedly eased to an eight-month low in October and the government took steps in September to open up industries such as retail and aviation to foreign investment.
South Korea’s Kospi Index has climbed 4.8 percent this year, while the Hang Seng China Enterprises Index has gained 4.7 percent and the BSE India Sensitive Index increased 22 percent.
UBS has underweight recommendations on Australia, Indonesia, Hong Kong and Malaysia, according to the report.