Will Asian Equities Rebound in 2012 After Tough Year?

The risks from Europe's debt crisis and a global slowdown have left investors in Asia reeling in 2011, but analysts tell CNBC, Asian equities will outperform and push global markets higher in 2012 because of further policy easing and better valuations.

An investor watches the electronic board at the stock exchange in Shanghai, China.
Chinafotopress|Getty Images
An investor watches the electronic board at the stock exchange in Shanghai, China.

Asian stocks measured by the MSCI Asia ex-Japan index have fallen around 15 percent in 2011, compared to the S&P 500, which is roughly unchanged for the year. According to Vasu Menon, Vice President, Wealth Management Singapore at OCBC Bank that underperformance has created attractive valuations.

"I think Asia ex-Japan is one region you cannot ignore," Menon said on Friday. "We know if you're a medium term investor, this is the buying opportunity."

Menon believes that growth in Asia will slow in 2012, but the fundamental factors underpinning the region remain intact.

"(Asia's) growth will still outperform the developed markets and Asian governments have better public finances, Asian consumers have better balance sheets as compared to balance sheets of elsewhere, affluence is growing in Asia," he said.

Michael Kurtz, Chief Asia Equity Strategist at Nomura believes the region's central banks and governments will also do more in 2012 to boost growth.

"Asian governments, including the Chinese and the Indians, have the policy powder to provide monetary relief as we come into the soft patch of the first quarter (of 2012)," he said. "That move towards (easing) in Asia will be one of the catalysts that starts to push markets higher."

The biggest risk for investors in the region remains a "hard landing" for China. According to OCBC's Menon it will take another 3-6 months before the data shows whether China is in for a major slowdown or just a cooling.

In the meantime, he believes, China will ease credit by cutting the reserve requirement ratios (RRR) for banks. "China is loosening up, we're looking at China easing the RRR by as much as 220 basis points during the course of 2012," Menon said. "They will not let the economy fall off the cliff, and I think once markets come to realize that, then Chinese equities will come into favor."

According to Nomura's Kurtz, investors shouldn't wait for a policy response before buying stocks because markets could move up rapidly after a policy announcement given the amount of money that is currently short equities.

"f you remember, earlier in December when China announced its RRR cut and it was coordinated with some dollar funding cost easing by other global major central banks, you (had) an 8 percent rally in one day on the Hang Seng index. And it's those sorts of potentially very explosive upward rallies in the market that could be driven by policy annoucnements in the first quarter," Kurtz said.

Among Kurtz's top recommendations are China-linked Asian equities, such as Australia, which he believes is deeply discounted, and Korea, which he said was a play on both Chinese consumer spending and Chinese capital equipment.

On the other hand, OCBC's Menon likes Singapore, where he says valuations are attractive.