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Asian stocks look pretty attractive: Portfolio managers

JAPAN-STOCKS/MIDDAY
Yuya Shino | Reuters

Big money managers see value in Asian stocks, where they say fundamentals remain reasonably strong.

"We're essentially constructive, not super bullish on Asian equities," said Ayaz Ebrahim, head of Asia Pacific asset allocation at J.P. Morgan Asset Management.

Regional indices have been hit hard recently amid volatility on the mainland and an oil price rout, with the CNBC Asia 100 index, which tracks the 100 largest companies in Asia Pacific, down 9 percent since the start of the year.

The blow to sentiment has left market players wondering how long the selling will last, but Ebrahim believes risks will soon abate.

"Volatility will continue this year, but hopefully not to the same magnitude we've seen recently."

Alongside U.S. interest rates and Chinese economic data, he flags diminished greenback strength as a key influence for markets this year.

"There will be some more dollar strength left this year but we're near the tail-end of it. We expect a gradual rise in [Fed] interest rates and if you look at most Asian currencies, they are already trading at their lower end now."

For now, he's overweight on the mainland, Indonesia and Thailand but going forward, improved corporate earnings are needed to accelerate stocks' gains, he said.

"Margins have declined and we need to see a pick-up in growth to help those margins but for that, we have to wait and see. Hopefully, the export picture improves with a stronger U.S. economy."

Rising intra-regional trade from initiatives such as China's One Belt, One Road (OBOR) and the Trans-Pacific Partnership (TPP) could also bode well for medium-term growth prospects and market sentiment, suggested economists at OCBC in a recent note.

Asia's affordable price-tag is luring investors in, too.

China and Japan's forward 12-month price/earnings ratio stand at 8.43 and 12.97 respectively, compared to 15.8 for the U.S. and 14.68 for Britain, according to data from asset management firm LGT.

"We like Asian equities as valuations are trading below its long-term averages," explained Ken Wong, Asia equity portfolio specialist at Eastspring Investments, adding that the recent sell-off was a buying opportunity for medium and long-term investors, with Asian stocks now 10 percent cheaper than two weeks ago.

But that doesn't mean every country is a bargain.

Major developed markets were trading in their established medium-term trading bands but Chinese stocks were at risk of further declines, according to Mikio Kumada, executive director and global strategist at LGT Capital Partners.

An improved corporate governance outlook also adds to the region's overall brighter outlook.

"Nine out of ten Asian companies paid dividends in 2014, which is much improved as compared to only 50 percent of the companies paying in 1998," said Wong.

"As an added bonus, Asian companies have high amounts of cash on their balance sheets and there is definitely a potential for companies to increase future returns to shareholders through either share buybacks or increasing dividends."

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