Title: Asian stock valuations dip to 26-month low on slowdown worries

Jun 07, 2022 05:10AM ET

By : AnalysisWatch

Asian equity valuations dropped to a two-year trough at the end of May, as regional shares were affected by concerns about monetary tightening by major central banks and supply chain disruptions.

According to Refinitiv, the 12-month price-to-earnings (P/E) ratio of the MSCI Asia-Pacific Index stood at 12.6 at the end of last month, the lowest since March 2020.

Regional equities have suffered major falls this year as rising inflation has fuelled recession fears and bottlenecks in China have prompted manufacturers in countries such as Japan and South Korea to slow production.

Data showed that the MSCI World index's P/E ratio stood at 15.3 at the end of last month, bringing its valuation premium over the MSCI Asia-Pacific index to 21%, well above the 10-year average of 14.8%

Regionally, North Asian equities traded at much lower valuations than South Asian equities.

The P/E ratio of Chinese and South Korean shares was around 9.4, while that of Hong Kong shares was 9.9.

On the other hand, Thailand and Indonesia had higher P/E ratios of 15.7 and 15 respectively.

Southeast Asia is expected to deliver higher earnings growth than its North Asian peers, benefiting from the post-pandemic recovery, rising commodity prices and still relatively accommodative central banks.

Analysts last month upgraded future earnings for Indonesian and Singaporean companies by 2.3% and 1% respectively.

Indian equities are leading the region in terms of valuation multiples with a P/E ratio of 19, despite concerns over rising inflation and oil prices.

Historically, there has been modest correlation between returns and valuation multiples (of Indian equities), so the potential for a correction to 16-18x remains.