Asian stocks trade at steep valuation discount to global peers

Asian shares’ relative price valuations hit a more than 18-year low compared to their global counterparts last week, after regional equities dropped in 2021 due to investor concerns over slower growth amid COVID-19-induced curbs.

The MSCI Asia-Pacific index’s (.MIAP00000PUS) forward 12-month P/E ratio stood at 14.27 at the end of last week, compared with the MSCI World’s (.MIWD00000PUS) P/E ratio of 18.31, according to Refinitiv data. That valuation discount of over 22% is the highest since at least June 2003, the data showed.

Shares in Hong Kong, China and South Korea were the cheapest in the region, with each market having a forward 12-month P/E ratio of less than 11.

The MSCI Asia-Pacific index shed 3.4% in 2021, compared with the MSCI United States’ (.MIUS00000PUS) gain of 25.24% and MSCI Europe’s (.MIEU00000PUS) 13.75% last year.

The parts of the stock markets in Asia that do look cheap on headline multiples are sectors including banks, insurance, or property, said Toby Hudson, head of Asian equity investments, ex-Japan, at asset manager Schroders.

“These sectors are typically beneficiaries of higher inflation and interest rates, so there may be opportunities for an improvement in returns in the medium term, if inflation is more than just a ‘transitory’ issue,” he said.

“However, these industries face ongoing structural challenges from the rise of fintech and e-commerce in the region, which limits our enthusiasm.”

According to Refintiv data, analysts have cut the MSCI Asia Pacific index’s 2022 earnings for the fifth consecutive month in December.

Real estate and consumer sector firms were among those facing the biggest earnings cut in 2022 over the past month, the data showed.

“Although there is a catch up expected for Asian companies profit growth, COVID-19 related issues are bound to drag Asia’s growth,” said Alicia Garcia Herrero, chief Asia Pacific economist at investment manager Natixis.