April 12, 2018 / 7:47 AM / 9 days ago

Graphic: Downgrades, misses on company earnings pose risk to Asian equities

(Reuters) - After a hugely disappointing outcome for Asian companies’ earnings in 2017, analysts are bracing for lower profits this year and expect stock markets will weaken in the coming months to reflect the dimming outlook.

A broker looks at a computer screen showing the movement of the market since the morning opening, at the Colombo Stock Exchange in Sri Lanka March 9, 2016. REUTERS/Dinuka Liyanawatte/Files

Asian stock markets were among the world’s best performing last year as a combination of synchronised global growth, low inflation and rising commodity prices spurred the first major upgrade in earnings estimates.

Yet, earnings for the year were below analysts’ expectations and they are now revising down their forecasts for 2018, suggesting more pain for stock markets which are already facing pressure from rising global interest rates and trade tensions.

MSCI’s index of Asia-Pacific shares outside Japan has tacked on just 0.18 percent this year, after advancing 33.5 percent in 2017.

Thomson Reuters data showed 62 percent of Asia ex-Japan companies missed estimated earnings last year, the highest in at least seven years.

Analysts said lower demand for tech products at the end of the year and a rise in input costs in the consumer and manufacturing sectors depressed profits.

Over the past three months, analysts have been cutting their 2018 earnings estimates for technology and industrial sectors - the two which saw the biggest earnings misses last year.

Asian companies’ net income grew 30 percent in 2017, their highest in six years. Yet, that was still 200 basis points lower than consensus forecasts.

Herald van der Linde, head of Asia equity strategy at HSBC said he now sees 12 percent upside for Asian equities in 2018, down from 15 percent at the start of the year.

“Asia’s earnings upgrade cycle has come to a halt,” Linde said in a report, adding there was downside risk from higher interest rates and trade disruption.

Thomson Reuters data also showed the quarterly rise in Asia’s forward earnings forecasts at the end of March was the lowest in over a year.

These tepid growth projections come a time when trade tensions between the United States and China are escalating and causing nervousness in the region’s stock markets.

Despite these risk factors, Asian equities’ forward price-to-earnings ratio is at 13.7, higher than its 10-year PE average of 13.2. India, Indonesia, and Philippine are the most expensive markets in the region.

“We are expecting a PE de-rating already in parts of emerging markets on increasing trade concerns, rising U.S. rates and increasing volatility, and a possible dollar strengthening from current levels,” said Sean Taylor, chief investment officer for the Asia Pacific at Deutsche Asset Management.

Josh Crabb, head of Asian equities at Old Mutual Global Investors, has been underweight the Philippines, Taiwan, and Singapore because they are relatively expensive and has more weighting in China and Vietnam where he sees markets relatively cheaper and things getting better.

Reporting By Patturaja Murugaboopathy; Editing by Vidya Ranganathan & Shri Navaratnam

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