Asian Stocks Face 3rd-Quarter ‘Correction’: Technical Analysis

(Bloomberg) -- Asian stocks face a “correction” this quarter, led by a drop in Indonesia, the Philippines and China, amid concerns that a recovery in the global economy will be delayed, according to BNP Paribas. The MSCI Asia-excluding Japan Index may fall to 307, which is one standard deviation below its average price to book value, while its 100-day moving average yields a target of 335, BNP analysts Clive McDonnell and Anando Maitra wrote in a report today. By combining the two technical factors, the analysts derived a forecast of 321 for the index, representing a 13 percent decline from yesterday’s close.The MSCI regional index has dropped 7.7 percent since its high this year on June 1 on concerns valuations are excessive. Even after the drop, the measure has gained 29 percent this year, rebounding from a record 54 percent slump in 2008.

The forecast “provides a useful guide for investors in assessing at what levels they should become aggressive buyers of markets,” the analysts wrote. “Catalysts for the correction include” a flattening of the yield curve in China, gains in the U.S. dollar and second-quarter earnings prospects, they added.A stronger dollar may slow fund flows to international stocks and hurt share prices in Asia, the report said. Investors withdrew $365 million from funds investing in Asia excluding Japan in the week ended July 8, according to EPFR Global.

H Shares
The Hang Seng China Enterprises Index may be one of the worst performers in Asia this quarter, with the measure tracking Chinese stocks traded in Hong Kong falling 21 percent to 8,103, the analysts wrote. The stocks are commonly known as H shares.Indonesia faces the largest drop this quarter, with the Jakarta Composite Index poised to fall to 1,399, the analysts wrote. That’s a 31 percent slump from yesterday’s close. The measure is the fourth-best performer in the world this year after a 49 percent gain.In the Philippines, the benchmark stock index may also slide 28 percent to 1,796, BNP Paribas said.A “dramatic flattening” in the Chinese yield curve is expected as the market prices in a faster increase in the rate on two-year interest-rate swap rate than that of the five-year swap. BNP said the trend signaled that the nation’s central bank has started to tighten its monetary policy.