We believe Asian markets are at a tricky juncture post the recent 30% rally. Although markets could squeeze higher based on stabilizing macro momentum, broad-based policy response and conservative investor positioning, we remain concerned about macro headwinds, optimistic earnings expectations, and full valuations relative to profitability.
Poor entry point for broad cyclical exposure
We would wait for a better risk/reward point before adding to cyclicals. Cyclical outperformance during the recent rally looks stretched, and historical bear bottoms suggest there would be multiple pullbacks even at turns to bull markets, providing better cyclical entry points. Recent declines in sector correlations also point to a greater need for differentiation.
Prefer domestic demand within cyclicals
For investors feeling underexposed, we prefer domestically-oriented cyclicals, which offer a more favorable intersection between fundamentals, valuation and price rebound potential. We emphasize machinery, construction, energy and real estate (especially those oriented towards China/India) as attractive sub-sectors to gain cyclical exposure. We also screen for stocks in cyclical sectors based on valuations and profitability.
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