Asia’s Stellar Profit Recovery May Be Showing Signs of Stalling

(Bloomberg) -- The rapid rebound in earnings estimates that helped fuel Asia’s equity rally may be showing early signs of leveling out.

As the latest results season approaches its end, about 36% of reporting MSCI Asia Pacific Index members have missed earnings estimates, a level higher than the previous quarter’s 30%, according to data compiled by Bloomberg. Twelve-month forward earnings-per-share estimates have climbed about 22% from their June low but are little changed from the end of February.

Profit revisions in the Asia-ex-Japan region are also moderating, according to JPMorgan Chase & Co.

“Earnings overall in the fourth quarter were in line with estimates and revisions in Asia ex-Japan are starting to turn lower,” Mixo Das, a strategist at the bank wrote in emailed comments. “We have argued since January that 2022 numbers look too high.”

Progress in containing the pandemic, the roll out of vaccines and a solid economic recovery in countries like China has helped fuel a rebound in estimates for corporate profits. While the region’s business activities have yet to return to normal, profit estimates for the benchmark index were back at pre-pandemic levels at the end of last month.

A slower increase in earnings projections has been one of the reasons for the recent weakness in Asian stocks, according to a JPMorgan note Monday. The MSCI Asia Pacific Index is down 7% from its February peak, compared with about a 2% retreat in its global counterpart.

Asian Profit Estimates Recover to Pre-Covid Levels: Taking Stock

Tech Leads

On a sectoral basis, technology stocks have been the standout performers this results season. About 80% reported earnings beat or met analysts’ estimates, according to data compiled by Bloomberg. Healthcare stocks, another industry that thrived during the pandemic, also outperformed with almost 70% of companies reporting in-line or better-than-expected profits.

Communication services firms saw the biggest disappointment, with 51% of the sector firms reporting worse-than-expected earnings. Industrials also lagged, with 46% missing estimates.

“Cyclical sectors such as energy and materials could deliver a firm 2021 earnings recovery, but we are not sure on the sustainability of these growth trends,” said William Yuen, an investment director at Invesco. Growth sectors like communication services, consumer discretionary and healthcare “will continue to deliver sustainable growth.”

Investors should watch earnings quality closely as it may increasingly drive share prices, especially for growth companies, according to Jessica Tea, a senior investment specialist for Asian equities at BNP Paribas Asset Management.

“We may see more divergence in stock performance as the market will get back to common sense and refocus on earnings quality,” Tea said. “As we head toward the second half of 2021, we should see more differentiation.”

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