Asian Stocks Soar in New Year, Boosting Bullish Calls

There is growing optimism among traders and Wall Street analysts about Asian stocks this year. Earnings, valuations and flows all look positive.

Since the end of October, the MSCI Asia Pacific Index has surged by 23%. This represents the biggest outperformance of the US benchmark by the index since 1993. Additionally, the index has also outperformed its European peer. The primary driver behind this growth has been China's reopening, with a weakening dollar providing an additional boost as investors seek out recession-proof markets.

The MSCI Asia gauge has climbed 7.2% in January, heading for the best start to a year since 2012. A survey of fund managers by Bank of America Corp. shows that the rally has many more months to run. China’s growth outlook is rapidly improving, which is a boon for the region’s economies. In contrast, earnings estimates are rising in Europe and the US.

As concerns about a possible recession grow in developed countries, more and more investors are looking to Chinese and other Asian assets as a safe haven. Gary Dugan, chief executive officer of the Global CIO Office, an asset manager and financial advisory firm, says that his company has increased its investment in Asia and that he expects this to pay off in the months to come.

China has been at the forefront of Asia's recent rally, with the MSCI China Index surging more than 50% since the end of October. However, optimism is also spreading to other countries in the region. Benchmarks in the Philippines and Vietnam have entered bull markets this month, while Taiwan is nearing the milestone.

According to BofA's Asia Fund Manager Survey, 95% of investors expect stocks in Asia Pacific excluding Japan to rise in the next 12 months, with half of them anticipating double-digit gains. The survey found that most fund managers are "unabashedly bullish on China."

Flows are reflecting the seismic view change. Foreigners have purchased $16.5 billion worth of mainland Chinese stocks in January alone, set to be the largest monthly inflow on record. They have also poured $3.3 billion into South Korea and $4.5 billion in Taiwan.

Despite the recent rally, Asia's valuations don't look stretched. The region's MSCI benchmark is trading at 12.9 times forward earnings estimates, which is in line with its five-year median.

An economic slump in the developed world may reduce some of the newfound optimism toward Asia, especially for export-dependent markets such as Korea. And as China’s economy gets back into full swing, there’s a risk of inflationary pressures increasing, which could keep central banks hawkish for longer.

Meanwhile, earnings in Asia are looking promising. Twelve-month forward profit estimates for the MSCI Asia benchmark have risen about 6% since the end of October, compared with a drop of at least 1% each for gauges representing the US and Europe, according to Bloomberg data. This paints a picture of a region that is weathering the global economic slowdown better than its counterparts.

According to Sarah McCarthy and other Bernstein strategists, there is no economy in Asia with a risk of recession. They expect Asian equities to end 2023 on a positive note.