Macquarie Asia Rocks on Stocks - Valuation differences high in cyclicals

ASIA Rocks on Stocks - Valuation differences high in cyclicals

Event
We examine individual stock P/BV valuations.

Impact
The sharp rally in Asian equities has pushed valuations towards long-term averages. The current ratio is 1.6x, about 15% below the long-term average
of 1.8x.

The increase in valuations has not been uniform. There have been very clear leaders and laggards in this upswing. This is clear when we look at individual stocks trading above long-term average valuations. A second screen looks at cheap stocks by calculating a recessionary average (the average ratio in 1998 and 2002).

The vast majority of the expensive stocks are in sectors linked to fiscal stimulus: construction, steel and cement. Other sectors that are prominent are stock exchanges, autos and consumer.

The cheap stocks are predominantly from two sectors only: banks and tech. The cheap banks are from Korea, Taiwan and Thailand. The cheap tech stocks are in hardware. There are also some cheap transport companies.

Outlook
We see this cyclical bounce as being overwhelming driven by an inventory restocking phase that will be positive for a broad range of cyclical sectors
in Asia.

In our view, the opportunity now is to shift out of the early performers linked to fiscal policy that are now expensive and into the stocks in tech and banks that are still cheap despite the recent rally.

Some of the stocks that stand out here are Shinhah, Sinopac and Krung Thai in the banks, and Hon Hai, AU Optronics and Novatek in tech.