N indices have not been immune to the Greek crisis and the wave of risk aversion that has been sweeping across the world, despite traders’ relatively bullish attitude towards the region. Major stock indices have all suffered: the Chinese Hang Seng H-Shares index has dropped 10 per cent since the middle of April, while the Japanese stock index is down 8 per cent and India’s Nifty 50 lost 5 per cent.
But with choppy European markets, contracts for difference (CFD) traders might well see some potential in jumping into Asian stock indices now to diversify their trading portfolios and benefit from the still-rosy growth prospects for the region.
There has certainly been a very strong economic upswing in Asia and while it is losing momentum, the upswing is slowing down in a relatively mild way, says Kevin Grice, international economist at Capital Economics. This strong economic backdrop translates into a very upbeat view on corporate profits in the region, adds Grice, noting that profits as a share of GDP are still low which means that they have room to increase structurally.
However, the upside potential for Asian stock market indices is far from uniform across the region. In Grice’s opinion, price-to-earnings (p/e) ratios are still relatively high in China, India and Indonesia: “You might not necessarily see sharp falls, but you might expect them to continue to underperform the region as a whole.” Their p/e ratios are 16.05 times, 21.92 times and 17 times respectively.
On the other hand, Grice is expecting outperformance from three key markets: Thailand – despite the recent political turmoil; South Korea – which, in his view, has a surprisingly low p/e ratio of around 10 times; and Malaysia.
South Korea suffered during the financial crisis from a severe liquidity crunch in the banking system and the corporate sector that took a long time to work its way through the system, says Grice, highlighting South Korea’s importance as a bellwether for the region. “It is seen by traders as the best play on the global economic recovery within Asia because of the export focus of the key companies quotes on the Seoul exchange.” He adds: “What’s helping Korea is that it has been able to increase its market share relative to the rest of Asia in selling to China.” This has not been fully priced in yet so the Korea 200 index could rise further.
But remember, you will have to tailor your lifestyle to suit the trading hours – Asian markets close around 8am UK time. But for the early birds, there’s plenty of upside for certain indices such as the South Korean Kospi 200.