As this is written, political developments in India raise hopes for a stable government after the 2014 general elections. The country’s BJP party put up a strong showing in state elections, fueling expectations that stock indices would touch a new high.


China’s upbeat economic data

Meanwhile, China reported that its trade surplus rose to the highest level in nearly five years in November, climbing to $33.8B from $31.1B in October and handily beating consensus estimates of $21.7B. Exports were up 12.7% on the year compared to +5.6% in October, and blew past forecasts of +7.1%. Imports grew 5.3% against +7.6% and consensus of +7.2%.

Asian markets trade firm

The Nikkei 225 Index is trading up +1.87%, Hang Seng +0.30%, Kospi +1.02% and the SSE (-0.09%). Asian markets appear to be in the mood to shrug off the ‘taper’ bogey after the US declared strong GDP and employment numbers last week. Asia seems to be gearing up to put the 2013 doldrums behind and regain investor confidence going into 2014.

What are analysts thinking?

The research team at Citi comprising of Markus Rosgen and Yue Hin Pong assess valuations in Asia in their research report “Pan-Asia Road Ahead: 2014 Outlook” of December 3, 2013.

Asia: Perverse to be pessimistic

“During what has been the longest period of de-rating in 40 years, trailing P/E for Asia ex-Japan has swooned from a peak of 25x to the current 12.6x,” says analyst Markus Rosgen. “Asian equities have so little allure, are so under-owned, that it would be perverse to be pessimistic about future performance,” he argues.


“With the exceptions of the period post the 1987 crash and the bursting of the 2000 tech bubble, Asia-ex has not traded below historic average valuations for this length of time,” point out Citi.

In fact, the analysts put forth a contrarian view, saying that implicit in the US ‘taper’ would be “the signal that US and global growth had found a firmer footing” – a boon for those Asia’s export-oriented economies that have current account surpluses.

Expect ~20% upside from Asia

The Citi analysts point out that valuations are currently 0.5 to 1.0 SD below mean, implying that the chances of positive returns during 2014 are bright. Within Asia, the Citi analysts prefer north Asia to the ASEAN countries because of the former’s higher linkages with global growth. Moreover the ASEAN countries have a higher component of current account deficits.

More liquid countries will fare better

However, the Citi analysts point out that liquidity would be key for markets to head higher – liquidity as measured by central-bank balance sheets. Balance sheets expand when current accounts run in surplus, and the liquidity spills over into the stock markets. Therefore equities in countries that have current account surpluses will fare better.

Sector views


The Citi analysts point out that the cheaper sectors are financials (8.8x), energy (8.9x), technology (9.4x) and consumer discretionary (9.6x). Earnings growth will be high for industrials (32%), materials (24%) and healthcare (22%).

“Our view is that the onset of US tapering will be a signal to investors to take on more Risk and seek more Growth, which should help the financial/cyclical space in Asia. These sectors are generally under-owned by investors, have been de-rated and offer attractive risk-rewards,” say the authors.

Sentiment in Asia still cautious

This is borne out by the fact that equity flows to Asia have been very light during the period 2010-2013 compared to fixed income inflows, as per the chart below.


Sentiment indicators are also ruling closer to the ‘Distress’ level than the ‘Euphoria’ level, as shown below:


Stocks to buy or sell

Country-wise top picks to sell or buy are given in the table below: