Asian Stocks May Not Track China Correction, Credit Suisse Says

(Bloomberg) -- Asian stocks may not follow a correction in China because valuations are lower than those of shares traded in Shanghai and as the region’s return on equity rises, Credit Suisse Group AG said. That’s even as a benchmark index for Asia excluding Japan, the Hang Seng Index and the Hang Seng China Enterprises Index have a high “correlation coefficient” with yuan-denominated shares traded in Shanghai, Credit Suisse analysts Sakthi Siva and Kin Nang Chik said in a note.

The Shanghai Composite Index has dropped 14 percent since rising to a 15-month high on Aug. 4 amid concern that a slump in exports and new loans will undermine China’s economic recovery. Even following the slump, the gauge has climbed 64 percent this year, while the MSCI Asia-Pacific Index has gained 45 percent.“The biggest difference lies in return on equity,” the analysts wrote. “Asia’s return on equity has been on a structural uptrend, rising over the past three troughs from 3.2 percent in 1998 to 9 percent in 2001 and to 10.9 percent in this cycle.”

Shanghai-traded stocks are valued at 29 times reported profit of its companies, compared with a price-to-earnings ratio of 17 times for the region, according to Credit Suisse estimates. Asia excluding Japan equities also have a price-to- book value ratio of 1.9 times, lower than the 3.5 times for Shanghai shares, they added.
While Chinese shares look “overvalued,” the mainland stock market has yet to reach “bubble proportions,” the analysts wrote, adding that previous so-called bubbles burst at price-to-reported earnings ratios of between 70 times and 75 times.

Recent stock market declines in China may be “overdone” as the government is unlikely to substantially tighten monetary policy, JPMorgan Chase & Co.’s Jing Ulrich said in a Bloomberg Television interview on Aug. 14.