Valuations in Asian equities attractive, but economic outlook also matter

Fundsupermart recently published an article that concluded as follows:

Within the regional markets that we cover, Asian markets currently have the most attractive valuations and strongest earnings growth. Fundamentals in Asian markets still seem generally sound despite the fears of higher inflation rates and higher oil prices. In addition, export growth and domestic spending will continue to be the two main drivers of overall Asian economic growth. In fact, ADB estimates that the economic growth of Asia excluding Japan will reach 6.2% in 2005. That is healthy growth. We are optimistic that Asia markets will continue to rally in 2005... For investors interested in single country investments, Korea, Thailand and China are currently some of the most attractively valued markets.

The low valuations of Asian stock markets are no secret. It is one of the reasons many fund managers like the region (and Europe for that matter). They would be aware of the fact that at current levels of P/E ratios, stock markets often do well, a fact pointed out by the Fundsupermart article.

The Fundsupermart article, however, also shows that P/E ratios were at around current levels too back in 1997. P/E ratios subsequently went up, but markets went down. The problem? Earnings plunged in the aftermath of the Asian Financial Crisis.

Low valuations are no guarantee of a rise to follow. Economic outlook is important too.

Currently, that outlook does not look too good. Growth in US employment in March was low, and consumer sentiment is declining. It is a similar story in Europe, and Asia -- which depends on the West for markets -- is also affected (see recent posts).

The purchasing managers' index for March gave mixed indications as far as equity investors are concerned. US PMI was relatively resilient at 55.2, slightly down from 55.3 in February. The prices sub-index, however, surged to 73.0 from 65.5 in February, indicating a worrying rise in inflation.

The global PMI tells a similar story. The March figure dipped to 52.7 from 52.8 in February. The acceleration in prices was marginal, though, with the sub-index for input prices rising to 64.8 from 63.5 in February.

The global new orders PMI held steady at 53.6, up slightly from 53.5 in February. It reflected positive trends in the respective sub-indices for the US and Japan but offset by a weaker one in Europe, once again underlining the disparity in economic outlook for different regions.