Asian stocks just cannot catch a break. Fresh from being whipsawed by rising geopolitical tensions over Taiwan, they now face what is forecast to be the worst earnings season since the start of the COVID-19 pandemic.
Earnings per share for MSCI Asia Pacific Index members slid 16 percent in the three months through June from a year earlier, the steepest decline in eight quarters, analyst estimates compiled by Bloomberg Intelligence showed.
That contrasts with a 9 percent gain for companies in the S&P 500 Index even as the US economy edged toward a recession.
Photo: AFP
The prospect of dwindling profits adds to the negatives that have dragged the MSCI Asia Pacific Index down almost 16 percent this year, putting it on course for its worst annual performance since 2018.
These include China’s COVID-19 lockdowns — a key reason for the region’s poor earnings performance, a slowdown in the semiconductor cycle and political furor over US House of Representatives Speaker Nancy Pelosi’s trip to Taiwan.
While the Asian stock benchmark just capped a fourth week of gains as US inflation slowed, the durability of the recovery is already being questioned.
“All the elements are not in place for a sustainable up-move,” said Rajat Agarwal, an Asia equity strategist at Societe Generale SA.
Earnings have yet to enter a new cycle, geopolitical tensions will continue to be priced in and financial conditions remain restrictive, he said.
A slowdown in China is one of the major factors pushing down regional earnings, particularly as Chinese firms make up about 20 percent of the MSCI Asia gauge.
Profits for MSCI China Index constituents are expected to slide 12 percent in the June quarter from a year earlier, dragged down by COVID-19 curbs, a cratering in the property market and dislocated supply chains.
Weakness in export-oriented sectors such as semiconductors is also hurting.
Analysts have cut back estimates for South Korea’s semiconductor giants Samsung Electronics Co by 16 percent and SK Hynix Inc by 34 percent from their recent peaks, citing falling global demand for electronics such as mobile phones and PCs.
“What’s happening in the US and Europe, companies pulling back on investments, that to me is the burden on tech hardware earnings right now,” said Tai Hui (許長泰), chief Asia market strategist at JPMorgan Asset Management in Hong Kong.
Still, there are some positive signs for Asian stocks. A halt in the US dollar rally is encouraging fund flows into a number of markets this quarter, and global investors have boosted holdings of shares in the region’s emerging markets outside of China for four straight weeks, the longest streak since January, data compiled by Bloomberg showed.
Hui said he favors reopening plays in Southeast Asia in the tourism and retail sectors, while Eastspring Investments is joining other asset managers in recommending Chinese electric vehicle stocks.
M&G Investments has said improving earnings should help shares in India and Indonesia continue to outperform.
Others such as T. Rowe Price are more cautious, saying they are waiting for further signs of improvement in the world’s largest economies before turning optimistic about earnings in Asia.
“These are still early days and we have to watch trends in US core inflation and employment in the coming months to gain further confidence in the sustainability of these trends,” said Haider Ali, associate portfolio manager for the firm’s emerging markets discovery equity strategy in Hong Kong.
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