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Emerging market equities, China in particular, seen as best buys

Jul 12. 2019
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By Wichit Chaitrong
The Nation

Chinese equities remain attractive despite the prolonged Sino-US trade war and the global economic slowdown, according to Citibank analysts.

The analysts gave an overweight rating to equities in emerging markets, particularly China due to the lower prices and the country’s stable economy.

Boonnisead Thanyaworanan, Citibank Thailand’s investment consultant, said the bank expects global earnings per share (EPS) to grow by 4 per cent in 2019, slightly below the consensus estimate of 5 per cent, due to different fiscal policies in each region, political uncertainties, and trade tensions between the world’s two largest economies. 

The markets will be looking at the EPS prospects next year, where current consensus on global growth stands at 11 per cent. 

He said Citi preferred emerging market equities, mainly due to cheaper prices than their counterparts in developed markets. 

The MSCI regional trailing price-to-earnings (P/E) ratio shows that emerging market P/E was 13.5 times on average compared to 18 times in the United States while long-run median emerging markets’ P/E has climbed to 19 times. 

“EM [emerging market] equities are a lot cheaper than developed market equities. EM trailing P/E is a lot lower than its long-term average while the trailing P/E in the US is somewhat higher than its long-term average,” he said. 

A-shares of Chinese firms that largely depend on the domestic market are particularly attractive given their lower prices. Focus should be on consumer goods sold in the Chinese market, products that would not be adversely affected in the event of the US further raising tariffs on Chinese products, Boonnisead said, adding that companies that could sell premium products in China are competitive and have room to grow. 

Equity prices in Taiwan and South Korea are above those in China but still relatively cheaper than other emerging markets, while Vietnam stocks are suitable for very long-term investment as their prices tend to be highly volatile in the short term.

The Stock Exchange of Thailand Index would rise should the US Federal Reserve cut its policy rate this month, leading to increased capital inflows, he said. 

Investors should hold multi-assets in their portfolio including investment-grade bonds. The bank has been advising clients to invest in US investment grade bonds since early this year and they have enjoyed returns. Bond holders would benefit from a cut in the US rate, he said.

The Fed will likely cut its policy rate by 25 basis points this month to avert the risk of an economic slowdown. Bond holders would be the first to gain from a lower rate given the stable returns, he said. Selective US stocks are also recommended as their prices could rise further.

Meanwhile, Citibank Thailand economist Nalin Chatchotitham said the global economic growth was expected to slow down slightly to 2.9 per cent this year, from 3.2 per cent in 2018 while inflation would dip from 2.7 per cent in 2018 to 2.4 per cent. 

“We expect the Thai economy to grow by 3.3 per cent, subject to downside risk. The forming of the new Cabinet on Wednesday has made Thai politics clearer and the market will respond positively to it. But any rise in the SET Index would depend on how the government implements policies. We remain worried about a delay in public spending as it would weigh down the economy,” she said. 

“Decline in exports is the biggest threat for the Thai economy,” she added. 

Research houses have predicted zero growth or a slight contraction for Thai shipments this year while the Commerce Ministry has revised down its export growth target to 3 per cent from the previous estimate of 8 per cent.

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