Will record-breaking run in Asian stocks continue?

After the turmoil in May and June this year, Asian stock markets have recovered and are now mostly up for the year, with many in record territory.

The year-to-date performances of the major Asian markets based on the Morgan Stanley Capital International indices are as follows:

	Local currency (percent)	US dollars (percent)
China	44.0	43.5
Hong Kong	15.2	14.8
India	38.6	39.1
Indonesia	38.8	49.8
Japan	1.2	1.2
Korea	-0.4	7.4
Malaysia	12.3	16.4
Singapore	18.2	25.7
Taiwan	7.2	6.9
Thailand	2.8	14.8

As a result of the strong gains this year, many Asian market indices are at or near all-time highs. Stock indices in Hong Kong, India and Indonesia in particular closed at record highs on 2 November.

Asia's growth story -- centred around the emergence of China and India -- are well known and is the force behind much of the stock market gains. Growing signs over the past few months of a slowdown in the United States economy -- the biggest market for many companies in Asia -- have not stopped investors from continuing to pour money into Asian stocks.

Joining the fray recently is Cumberland Advisors. In a commentary written on 30 October, Bill Witherell, vice President and portfolio manager at Cumberland Advisors, suggested investing in Singapore stocks as a way to gain exposure to the region.

"At Cumberland, we believe that Singapore offers an attractive way for our investors to participate in one of the most dynamic regions of the global economy in a sound market within a stable, well-managed economy," he wrote. "As part of our move to fully invested positions in our managed ETF portfolios, we have added an overweight position in Singapore to our International Portfolios."

Witherell cited some statistics to support his recommendation. He pointed out that Singapore's economy is likely to grow over 8 percent this year and perhaps 7 percent next year. The market earnings yield is 7.3 percent while the 10-year bond rate is 3.2 percent, giving an implied equity risk premium of 4.1 percent. The average dividend yield in the Singapore market is 3.1 percent.

"These measures are bullish for stocks," he wrote.

As far as seasons are concerned, he may be entering the market at a relatively good time. In a report on 2 November, Forbes cited Citigroup as saying that over the past 16 years, Asian markets outside of Japan offered their best returns in the three months from November through January.

Valuation, though, may weigh on markets. Citigroup also said that the current price-to-book value ratio of 2.2 for Asia is the second-highest in 16 years. The only year in which it was higher was 1994, when the price-to-book value was 2.4; Asian stocks lost money then.

The same applies to the Singapore market as well. While the earnings yield cited by Witherell sounds good, it is based on the good run of earnings growth over the past few years. Earnings growth is expected to slow with economic growth next year. In terms of book value, the Singapore market is already trading at about 2.1 times book value. The last time it traded higher was in 2000 and we know what happened after that.

Mark Laudi, chief executive officer of Investor Central, would no doubt have known too when he wrote recently that he was getting worried about the continued run-up in prices in Singapore.

"Right now the market is being pushed into record territory by 'me-too' money coming in. That is, people who are joining the rally because the market has already had a good run," he wrote in the Investor Central blog on 16 October. "That is the WORST possible time to be jumping in."

Apparently, not many investors agree as many Asian market indices, including Singapore's Straits Times Index, went on to record new all-time highs after that commentary. Perhaps these investors are aware of and are trying to exploit the year-end effect highlighted by Citigroup.

Or perhaps they remember that ten years ago, in 1996, with the Standard & Poor's 500 Index near an all-time high and US stocks trading at higher than average historical valuations on record high earnings, then-Fed chairman Alan Greenspan worried about "a stock market bubble" and "irrational exuberance", only to see the S&P 500 double over the next four years.

Is it Asia's turn now?