Published November 13, 2008

Irrational pessimism holds sway

Valuations at record lows but investors expect larger drops in earnings: Morgan

By EMILYN YAP

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'IRRATIONAL pessimism' is ruling Asian equity markets even though valuations are at record lows and inflation is poised to fall, said Morgan Stanley's Asia-Pacific regional strategist Malcolm Wood yesterday.

Upbeat note: A US$50 decline in the per-barrel price of oil adds 5per cent to Asia's GDP, Mr Wood says

According to Mr Wood, 11 of 12 valuation metrics at Morgan Stanley have hit record depths but investors continue to expect larger drops in corporate earnings.

'The market seems to be assuming something like a 40 per cent-plus decline in earnings just to get to the trough in the prior downturns,' said Mr Wood at Morgan Stanley's Asia-Pacific Summit.

'The market's assuming something cataclysmic for Asia. We think (the situation's) bad, but nothing as near as that.'

As for Singapore's market, earnings expectations are still weak, said Mr Wood. But 'if you can take a (view that is longer than a couple of months, the market) looks quite attractive.' An imminent drop in inflation as commodity prices fall will also give central banks in Asia the flexibility to loosen monetary policy, providing some relief for markets.

'Commodity inflation in Asia drove the headline inflation up to 6 per cent plus. That's coming off sharply,' said Mr Wood. 'That means that central banks in Asia have room to aggressively cut rates further.'

China, for instance, has already cut interest rates three times since September. A Morgan Stanley report dated Nov 6 pointed out that other Asian countries such as Malaysia and Thailand could ease rates over the next year.

A fall in oil prices would bring particularly huge benefits to Asia. A US$50 decline in the per-barrel price of oil adds almost 5 per cent to Asia's GDP, Mr Wood estimated.

Morgan Stanley's head of global emerging markets equity strategy, Jonathan Garner, was also positive on the outlook for Asia.

'Asian companies' balance sheets are much healthier,' he said. According to the Morgan Stanley report, leverage in Asia's corporate sector is at a record low of 32 per cent, which is about half the levels seen 10 years ago.