U.S. investors were sent running for the exits after the Fed, when unleashing the widely expected “Operation Twist” on Wednesday, jolted sentiment with a gloomy outlook for the U.S. economy.
Asian markets were also caught in the downdraft, with major stock indices losing between 2 and 4 percent on Thursday. But rather than simply taking direction from Wall Street, Ajay Kapur from Deutsche Bank suggests that Asia’s recent selloff is actually an indication that economic growth in the region is slowing down.
"I think the best leading indicator for Asian economies is the equity markets themselves…. and they are telling us that things are a lot slower than what economists, strategists and analysts currently believe," said Kapur, Head of Equity Strategy at the bank.
Within equities, cyclical stocks would be the best gauge of the economic health, he noted.
"And while U.S., European and Japanese cyclical stocks were doing reasonably well, in Asia they were doing horribly,” Kapur said, adding that while U.S. stocks have rebounded up to 9 percent since its August lows, stocks in Asia have stayed mostly flat.
With the a looming double dip for the U.S. economy and Europe’s debt crisis spiraling, Kapur says it’s hard for Asia to stay immune, and equities will take a hit in tandem.
“I've maintained for over a year that Asia and emerging markets are going to underperform,” I think the point is the Asian markets are very cyclical and our return on equity profile is looking quite horrendous in the next 2 or 3 years compared to the U.S. and Europe,” he said.
He also believes analysts are overly optimistic with their earnings projections for Asian companies.
“Analysts are expecting this year 12, 13 percent EPS growth; for next year again 12, 13 percent. I think that number might be right, but the sign on it might be wrong. In other words, if we do get a U.S./European recession, then earnings growth is going to be negative next year," Kapur said.
The only place he would invest he says is Japanese stocks, which he described as “super cheap.”
“This is the first time really in about 25 years that they've looked cheap,” he said, and advises buying domestic-oriented companies with a lot of cash flow.
“Remember that Japan year to date has beaten pretty much every large emerging equity market, and pretty much every European market. So it's actually been quite resilient in the face of pretty volatile markets.”