While developed and emerging market stocks have been locked in a close race so far this year, with the MSCI World Index and MSCI Emerging Markets Index up 8 and 10 percent, respectively, strategists say Western equity markets are likely to outperform their Asian peers in 2012.
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“Earlier this year…there was a short, tactical window where Asia might outperform the developed markets – well they have just barely done that, and now we think that even this tactical window has closed,” Ajay Kapur, Head of Equity Strategy, Asia, at Deutsche Bank said in a report.
Kapur says the large gap between U.S. and Asian “economic surprises”, which made investors more cautious about investing in the U.S. late last year, has converged.
“The economic surprises in the U.S. were at record highs late last year, while those in Asia were exceptionally low. (Now) both regions show economic surprise close to zero,” he said. “So, the advantage that Asian equities enjoyed is gone.”
Major markets in the West including the United States' S&P 500 and Germany’s DAX have risen 8.7 and 11.4 percent, respectively since the start of 2012. While within the emerging markets, China’s Shanghai Composite and India’s Sensex have gained 8.6 and 11.2 percent each, year-to-date.
According to Kapur, positive earnings out of the United States and Europe in the coming months will be a key driver of their outperformance in 2012.
“The earnings (growth) expectations in both the US and Europe are quite low now. For Europe, about 3 percent and for the U.S. about 6-7 percent. In Asia, now the expected earnings growth is about 15 percent, so I think beating the U.S. and European numbers is going to be pretty easy,” he said on CNBC Asia’s “Squawk Box” on Tuesday.
He adds that the free cash flow yield, which measures how much free cash per share a company generates, is higher in the West than in Asia, making the former more attractive.
“The free cash flow yield in Asia is only 2-3 percent, whereas even Japan is at 4 percent and the U.S. and Europe are about 7-9 percent. Whichever way we slice it in terms of valuations for equities, we preferred the developed (countries) to Asia,” Kapur said.
According to Steve Brice, Chief Investment Strategist at Standard Chartered Bank, the “less proactive” monetary policy environment in Asia is likely to constrain the relative performance of the region’s equity markets.
“China naturally plays a key role here and the reluctance to embrace significant broad-based easing has been an impediment (to stock) markets in recent months,” Brice said.
Bullish on US Equities
Among the developed countries, analysts back the U.S. markets over their European counterparts. John Woods, Chief Investment Officer at Citi Private Bank is bearish on euro zone equities, but thinks the U.S. markets will likely outperform emerging markets in Asia.
“To the extent Europe is in recession and a large question marks hangs over China, is it any surprise that the U.S. is attracting a safe haven bid at the moment?,” Woods said.
Brice of StanChart says within developed markets, he has a “definite preference” for the U.S.
“The economy looks more resilient than 12 months ago, even if it is likely to disappoint in the near term,” Brice said.
He adds that while Europe is attractive from a valuation perspective, the challenging economic environment may come in the way of broader market gains. “Authorities provide no leadership in managing the austerity versus growth trade-off, focusing almost entirely on the former. Therefore, we remain underweight Europe.”
