Asian equity markets stumbled in June amid intensifying U.S.-China trade frictions, a development that’s also made the outlook for regional stocks less rosy than at the beginning of this year, according to strategists.
Apart from the souring of risk appetite among investors due to fears of a potential trade war, recent declines in the Asian markets also come against the backdrop of the synchronized global growth story beginning to show signs of cracks and a firmer dollar. All of that has seen a number of institutions pare back their year-end and 12-month targets for markets in the region.
Analysts at Morgan Stanley see Hong Kong as a market that’s “particularly at risk,” highlighting the likelihood of “a further sharp drawdown” for the benchmark Hang Seng Index.
Analysts and strategists at the bank in June cut their 12-month target for the Hang Seng Index to 27,200 from their previous target of 30,350. The new target represents nearly 3 percent more in declines compared to the current level the index traded at as of Asia Thursday morning trade. The benchmark is currently in correction territory, down more than 19 percent from its January highs.
Among the reasons cited by Morgan Stanley for the revision were the Hong Kong benchmark’s sensitivity to global monetary policy (due to the Hong Kong dollar’s peg to the greenback), weakness in the yuan, as well as decreased southbound flows via the schemes connecting mainland investors with Hong Kong’s market.
Morgan Stanley also lowered its target for the mainland market, revising its 12-month forecast for the CSI 300 — an index of the largest stocks traded on the mainland — to 3,500 from 4,200. “Although it is not impacted by CNY weakening, the CSI 300 is suffering to a greater extent than we had expected,” analysts wrote in a note, citing slowing China data and the shadow banking credit slowdown as factors.
But others have stuck to their guns when it comes to their China calls.
J.P. Morgan has an end-year target of 105 for the MSCI China Index, which tracks large and mid cap offshore China stocks, for its base case. The MSCI China Index last stood at 83.757 as of July 4.
Pedro Martins, an emerging markets equity strategist at J.P. Morgan, said robust earnings upgrades were a key reason, although some risks, related to trade tensions heating up between the U.S. and China, remained. Still, he said macro developments, such as Beijing’s efforts to deleverage, were a positive in the longer term.
Nomura, meanwhile, has kept its target for the MSCI China Index steady at 80, around a 4 percent drop from current levels. Wendy Liu, head of China equity research at Nomura, said the target still seemed applicable as she had started with a conservative estimate.
And despite recent fluctuations seen in the market, Liu pointed to the upcoming earnings season as a potential turning point for investor sentiment.
Amid the reduced targets, however, there still remains some degree of confidence in equity markets in Asia Pacific.
Goldman Sachs lowered its 12-month target for the MSCI’s index of Asia Pacific shares excluding Japan to 625 from 640 — representing more than 17 percent more upside from the index’s current levels — but analysts concluded that the “investment case for regional equities is well-grounded,” citing above-trend economic growth in the region and earnings growth.
Among the challenges regional markets faced were ongoing U.S.-China trade dispute, slowing global growth, tighter U.S. monetary policy and a firmer greenback, Goldman Sachs analysts said in a note.
J.P. Morgan’s Martins told CNBC that, even though the bank’s year-end target for the MSCI Emerging Markets Index was reduced to 1,230 from 1,300, Asia saw relatively fewer revisions compared to emerging European and Latin American markets.
