* Asian equities have risen 35% over the past five weeks
* But there is no reason why they can't run a little further
* Valuations remain reasonable, the newsflow will continue to improve - and
investors are still very bearishly positioned
Since we published our Quarterly on 6 April, markets have continued their
strong rebound. MSCI Asia ex Japan is up a further 6% since then, taking
the total rise since March 3 to 35%. For individual markets, rises have
been even more spectacular: Korea is up 48% and India 44% since March 3.
China, which bottomed earlier on October 27, is up no less than 72%.
Can the rally really continue any longer? Sceptics will argue that, with
the RSI at 72 (well above where it got to in previous rallies) and the Q1
earnings season in the US and Asia likely to be terrible, the market will
come tumbling back down soon.
We think the chances are this rally can continue for a while. Valuations
are not yet an issue, with PB for Asia ex Japan still 18% below its
long-term average. Newsflow is likely to be positive over the coming
months, as economic data series continue to improve and analysts start to
raise their earnings forecasts (and stock recommendations) to reflect this.
We found on our recent marketing trips that institutional fund managers are
almost unanimously bearish (and scrambling to get exposure to avoid missing
out on the rally). Moreover, there are plenty of examples in history of 50%
rebounds - either bear market rallies or initial bounces off the bottom. It
is true the market won't go up in a straight line (since the deleveraging
process is far from over, and the economic recovery may not be sustainable
once fiscal and monetary stimuli are withdrawn). If the global economy
double dips, stocks could correct in the second half. But, for now, enjoy
the fun.
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