Stock Pickers Look East as Asian Rally Outpaces Europe, U.S.

Asia is in the driver’s seat of the global equity rally for the first time in nine months.

The MSCI Asia Pacific Index is up 5.2 percent in April, the first time it’s beaten both the Standard & Poor’s 500 Index and the European benchmark measure since July. Stock gauges in Shanghai and Hong Kong posted some of the world’s biggest gains, climbing to levels not seen in seven years as China’s slowing economy buoyed expectations for additional stimulus.

“The strong performance in Asia thus far has been driven by China,” said Kelvin Tay, Singapore-based chief investment officer for South Asia Pacific at UBS Wealth Management. “The Chinese economy still hasn’t bottomed out so there is more room for further easing. Even if the the U.S. starts normalizing rates, we still have a lot of liquidity sloshing around.”

With the Federal Reserve signaling readiness to raise interest rates this year for the first time since 2006, monetary authorities in Asia are taking up the slack. China’s central bank reduced interest rates twice since November and lowered reserve requirements for lenders this month. The Bank of Japan on Thursday kept record stimulus in place, while policy makers in South Korea cut borrowing costs to an all-time low in March.

All of the MSCI Asia Pacific Index’s 10 industry groups advanced in April, with energy shares soaring 12 percent to lead gains as oil rebounded. Companies that benefit from increased stock turnover in Hong Kong surged, with the city’s bourse operator advancing 56 percent and brokerage Haitong Securities Co. climbing 35 percent.

Europe, U.S.

While central-bank stimulus has also been a boon for Europe’s equity investors, with the Stoxx Europe 600 Index soaring 16 percent last quarter as Mario Draghi unveiled an unprecedented bond-buying program, the rally stalled in April. The stock measure was little changed on the month through Wednesday, with gains in Austria offsetting a slump for German exporters as the euro rebounded. Investors are weighing data signaling the region’s economy is recovering, and Greece remains locked in an impasse over bailout aid.

The S&P 500 added 1.9 percent in April through yesterday, posting just one daily move of more than 1 percent in the span. The gauge closed at a record on April 24, a feat that’s become commonplace in a six-year bull market. Fed officials have said their decision on when to raise rates will be guided by the latest data.

A correction is inevitable in May after the four-month rally for Asian equities, according to Khiem Do at Baring Asset Management Ltd. Even as stocks across the region slumped on Thursday, the Hang Seng China Enterprises Index still posted a 17 percent surge in April. The Shanghai Composite Index jumped 19 percent and the Hang Seng Index rose 13 percent.

Looking Shaky

“The month of April has been brilliant,” said Do, who helps oversee about $60 billion as head of multi-asset strategy at Baring Asset in Hong Kong. “We should expect some consolidation. With global markets looking a bit shaky at the moment, some trading money managers may look to close some of their positions and lock in some profits. The month of May is always a bit tricky.”

Valuations may have run ahead of fundamentals amid signs the world’s biggest economies are slowing, according to Mark Lister, Wellington-based head of private wealth research at Craigs Investment Partners Ltd. The MSCI Asia Pacific Index traded at 14.8 times estimated earnings on Wednesday, up from 13.5 times at the beginning of the year, according to data compiled by Bloomberg. The S&P 500 was valued at a multiple of 17.9 yesterday, compared with 16.8 for the Stoxx 600.

China Economy

The Asian equity gauge slid 1.6 percent as of 4:18 p.m. in Hong Kong Thursday, poised for its biggest drop since January, as Honda Motor Co. slumped after its profit missed estimates and investors digested data showing the U.S. economy barely grew in the first quarter.

A preliminary gauge of Chinese manufacturing fell to a 12-month low in April, a report showed last week, suggesting government efforts to cushion a slowdown are yet to revive the nation’s factories.

“It makes a lot of sense for people to be taking a bit of risk off the table,” Craig Investment’s Lister said by phone. “The odds of a minor correction over the next few months have probably increased. There’s still a lot of risks out there and people have just got a little bit complacent.”

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