Asia’s Improving Earnings Scorecard Is Failing to Boost Stocks

(Bloomberg) -- Corporate Asia is wrapping up a solid bounce-back quarter when it comes to earnings, but that’s hardly translating into stock gains for companies.

With majority of the results out, companies in the MSCI Asia Pacific Index have delivered an aggregate positive earnings surprise of 7.7% so far, according to data compiled by Bloomberg. That’s versus a 23% aggregate miss in the previous quarter. Yet in both earnings seasons, shares of the reporting firms have risen less than 0.5% on average on the first day post results.

“I would assign the lack of stronger gains more to the outlook concerns, much like how U.S. earnings failed to elicit further positive reactions in the latest third-quarter releases,” said Jingyi Pan, market strategist at IG Asia Pte. “Using Singapore as the example here, it really is a matter of longer than expected Covid-19 effects. The year-end recovery is now a 2021 recovery. If this continues, a second half of 2021 recovery... Who knows.”

The post-earnings reaction also goes to show the difficulties investors are facing in parsing results as the virus and vaccine updates continue to sway the outlook. The latest reporting season also saw traders grappling with the added uncertainty related to the U.S. election.

The MSCI Asia Pacific Index has risen just about 8% since mid-August in the current results season, much less than the 18% gain seen in the prior period, when earnings disappointed.

“The main issues are investor positioning and valuations,” not the quality of earnings, said Alan Richardson, a fund manager at Samsung Asset Management in Hong Kong. “The return was higher in the early bounce because the valuations declined to a low level and investor positioning was light.”

Winter Headwinds

News about a possible vaccine breakthrough earlier this week prompted a global shift among equity investors from fast-growing companies into parts of the market that have struggled with lockdowns and economic pain. However, that transition has since eased on the realization that a return to normalcy is still a ways off.

Investors are looking forward to pricing in a cyclical recovery and earnings mean reversion, but it will be volatile because the timing of mass immunization is still highly uncertain, Richardson said.

Underscoring the risk from the virus to investor sentiment, Japanese stocks on Friday led losses in Asia, with the Topix index sliding the most in two weeks. Japan hit a new daily record of infections on Thursday, with authorities hinting at stepping up measures to arrest the spread of the pathogen.

“Investors are probably looking past the current earnings season into multiple headwinds in the winter -- pandemic wave, stalling fiscal stimulus and tepid energy demand outlook,” said Margaret Yang, a strategist at DailyFX.

©2020 Bloomberg L.P.