Asian stocks at cheapest relative to US in at least 13 years

[TOKYO] Even after handily beating American stocks last year, Asian shares have actually got cheaper relative to their US counterparts.

On a forward price-to-earnings basis, the MSCI Asia Pacific is trading close to at least a 13-year low relative to the S&P 500, according to data compiled by Bloomberg. And on a price-to-book basis, it is at the cheapest in 16 years.

According to Mark Tinker, head of AXA Framlington Asia in Hong Kong, emerging market equities, which tend to have a heavy representation of Asian shares, are as cheap against their US counterparts as they were after the Asian financial crisis in 1997.

"This is extraordinary for a number of reasons," he wrote in a recent note to clients. "First and most obviously Asia is in a very different economic position than it was then. Earnings are growing steadily, balance sheets are strong, real wages are rising, dividend payouts are high and payout ratios are rising."

Most important for Mr Tinker however is the fact that 20 years ago Chinese GDP was less than US$1 trillion and that since 1997, it has grown by a multiple of 11 times.

Asian stocks, like many across the globe, have had a strong start to 2018. The MXAP is up about five per cent, in line so far with gains across the Pacific and slightly ahead of the 4 per cent gain in the MSCI World.

Whilst some investors may be concerned about the sustainability of the current stock rally, for Axa there continues to be a rationale behind the relative attractiveness of Asian equities.

"Not only are Asian stocks generally seen as good value compared to their US counterparts, but cyclical stocks are particularly good relative value," Mr Tinker wrote.

"Asia currently provides between a quarter and a third of all dividends globally and yet barely features in the portfolios of most income investors."

BLOOMBERG