Asian Stocks May Decline 4.9%, Deutsche Bank Predicts

(Bloomberg) -- Asian stocks may halt their rally this year as a recovery in earnings hasn’t caught up with gains in prices, Deutsche Bank AG said. The MSCI AC Asia excluding Japan Index may end the year at 351.5, a 4.9 percent decline from yesterday’s close, according to a report by Niklas Olausson, an analyst at Deutsche Bank. The forecast is still 46 percent higher than its earlier target.The MSCI regional index rose 2.5 percent to 378.71 as of 8:09 p.m. in Singapore, taking its gains this year to 31 percent and surpassing the 3 advance in the MSCI World Index. Asia accounts for half the 10 best-performing markets in the world this year, led by India and China.

“The rally has been largely fuelled by sentiment and liquidity drivers, in addition to expectations of a lasting recovery, rather than hard fundamental profit/return delivery,” the analyst wrote. “We are not out of the woods yet as far as a further downside risk to earnings is concerned.”

Following the gains this year, the MSCI Asian index is now valued at 18 times reported earnings, compared with its five- year average of 14 times. The measure’s price-to-book multiple has also climbed to 1.7 times, up from a low of 1 time set in October.Deutsche Bank is predicting a 22 percent increase in earnings-per-share next year, compared with a gain of 31 percent estimated by other analysts, the report said.

‘Improved Outlook’
“Equity markets have already factored in most of the improved outlook,” Olausson wrote. “Markets may overshoot in the near term, but thereafter we anticipate a period of pullback and consolidation, before markets climb up again.”Allianz SZ, Europe’s biggest insurer, said it has bought Asian equities, bonds and real estate in the past two months and would only add to its existing holdings at cheaper prices. “Where we are today, we feel the market is toppish,” Nikhil Srinivasan, who oversees $20 billion as chief investment officer for Asia and Middle East at Allianz, said in an interview in Singapore on May 18. “Valuations are about fair, it’s not cheap. The risk-reward ratio is not that attractive and investors are getting a bit tired chasing the rally.”

The Singapore-based fund manager expects Taiwan and India to outperform other Asian markets, adding it doesn’t plan to be “too aggressive” on stocks.

India
India was upgraded to “overweight” from “neutral” at Deutsche Bank, which said the election results was a “positive surprise” for the market. The brokerage yesterday raised its target for the benchmark Bombay Stock Exchange Sensitive Index to 14,500 from an earlier estimate of 11,500.

The measure surged a record 17 percent to 14,284.21, triggering a suspension in trading after breaching its upper limit set by regulators. The Sensex added 0.1 percent to 14,302.03 today.

Indonesia and the Philippines were also raised to “overweight” from “neutral” while South Korea was upgraded to “neutral” from “underweight,” the analyst said. He added that Thailand was cut to “underweight” from “overweight” while Hong Kong was lowered to “underweight” from “neutral.” Deutsche Bank is also “turning progressively more cautious” on China as the gains this year lift valuations, Olausson wrote in the report. The brokerage retained its “overweight” rating on the market and said it expects China to outperform the rest of the region by the end of the year.