These Are the Stocks Fund Managers Are Watching Ahead of Earnings Season
What Stocks Fund Managers Are Eyeing as Earnings Season Looms
(Bloomberg) -- The world of stocks has changed a lot in just three weeks. At least seven Asian markets have rebounded more than 20% from their March lows, pushing the region’s benchmark to a level just 3% away from technical bull territory.
Yet this sharp rebound is facing a real test in the coming weeks -- earnings. The unfolding reporting season will be the first chance for many investors to gauge the coronavirus impact on businesses. And for some bulls, it may even lead to opportunities to add positions. While money managers’ playbooks vary, the bottom line is clear: volatility may return anytime.
“Caution is warranted, especially going into the results season where a wide dispersion in analyst estimates could be a recipe for renewed volatility,” said Adrian Zuercher, head of Asia Pacific asset allocation at UBS Global Wealth Management CIO.
The street still projects a 9% increase in 2020 earnings for Asia excluding Japan, which remains “fairly optimistic” compared with the firm’s zero growth estimate, he added. Asian Pacific stocks lost 1% on Thursday, the most in 11 days.
That said, Zuercher views a potential sell-off as a chance to buy stocks as the region may end this year higher. “It doesn’t matter if it is a V, U, or a ‘swoosh’ recovery, as long as it is not an L,” he said. Investors appear under-invested in the recent rally, and they may “write off first-quarter and second-quarter earnings as an extraordinary loss and start to focus on the second half and 2021,” he added.
More Upside
His view was echoed by Khiem Do, head of Greater China investments at Barings. While we are not of the wood yet after a horrendous rout, “investors are likely to look ‘beyond the deep valley’ for investment opportunities,” said Do, who also sees more upside in Asia stocks.
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Even after the recent rebound, Asia equities “remain quite cheap” historically and relative to the rest of the world, as well as compared with local bond rates, he said.
Measured against estimated earnings in 2021, the region’s benchmark is trading at 13.6 times, slightly below its five-year average and lower than 17 times for the MSCI index for global stocks, according to data compiled by Bloomberg. In terms of price to book value, Asian equities are now at 1.2 times, compared with a five-year average of 1.4 times.
Investors “can take a dollar cost averaging approach to gradually start investing in equity markets here in Asia as most Asian equity markets are now very attractive from a valuation perspective,” said Ken Wong, a client portfolio manager at Eastspring Investments. “Low valuations coupled with low market expectations can provide opportunities for investors.”
Searching for Post-Crisis Winners
To Fidelity International Ltd. Investment Director Medha Samant, the extent of the earnings and economic slowdowns has not been fully priced in, but what’s more important is identifying areas where businesses will recover quickly or benefit from structural changes in the aftermath of the health crisis.
She favors Macau casinos, as well as segments like e-commerce, insurance and online education. “The economic outlook is tough, and it’s getting tougher by the day,” Samant said. “But there are still companies or sectors that could emerge stronger and can bounce back.”
Longer-term themes include more investments in health care; a reappraisal of welfare systems and low pay in services; a reassessment in inventory management and global supply chains for critical goods; and technology for working from home and IT infrastructure, according to Colin Harte, a multi-asset portfolio manager at BNP Paribas Asset Management.
Still, further progress of sentiment recovery will depend on the visibility and recovery in earnings and economic activity. “It is unlikely that equity indices will return to their recent highs for some time,” Harte said.
©2020 Bloomberg L.P.