Asian analysts expect biggest drop in profits since 2018

Asian stocks simply cannot take a break. After being whipped by rising geopolitical tensions in Taiwan, they are now facing what is expected to be the worst earnings season since the start of the COVID-19 pandemic.

Earnings per share for members of the MSCI Asia Pacific index fell 16% in the three months to June from a year earlier, the biggest drop in eight quarters, according to analyst estimates compiled by Bloomberg Intelligence.

This contrasts with a 9% gain for companies in the S&P 500 index even as the US economy headed into a recession.

Photo: AFP

The prospect of lower earnings adds to the negative effects that have sent the MSCI Asia-Pacific index down nearly 16% this year, putting it on track for its worst annual performance since 2018.

These include COVID-19 lockdowns in China – a key reason for the region’s weak earnings performance, a slowdown in the semiconductor cycle and political furor over the president’s trip. of the United States House of Representatives Nancy Pelosi in Taiwan.

With the benchmark Asian equities just capping a fourth week of gains as US inflation slowed, the sustainability of the recovery is already in question.

“Not all the elements are in place for a sustainable upside,” said Rajat Agarwal, Asia equity strategist at Societe Generale SA.

Earnings have yet to enter a new cycle, geopolitical tensions will continue to weigh in and financial conditions remain tight, he said.

A slowdown in China is one of the main factors weighing on regional earnings, especially since Chinese companies make up around 20% of the MSCI Asia index.

Earnings for constituents of the MSCI China index are expected to fall 12% in the June quarter from a year earlier, dragged down by COVID-19 restrictions, a crater in the real estate market and supply chains dislocated.

Weakness in export-oriented sectors such as semiconductors is also hurting.

Analysts cut estimates for South Korean semiconductor giants Samsung Electronics Co by 16% and SK Hynix Inc by 34% from their recent highs, citing falling global demand for electronics like cellphones and PCs.

“What’s happening in the United States and Europe, companies withdrawing investment, that’s the burden on tech hardware revenue for me right now,” said Tai Hui (許長泰), chief strategist of the Asian market at JPMorgan Asset Management in Hong Kong.

Still, there are positive signs for Asian equities. The halt in the US dollar’s rise is encouraging fund flows to a number of markets this quarter, and global investors have increased their equity holdings in the region’s emerging markets outside of China for four consecutive weeks, the longest streak since January, according to data compiled by Bloomberg showed.

Hui said he was in favor of reopening games in Southeast Asia in the tourism and retail sectors, while Eastspring Investments joins other asset managers in recommending stocks Chinese electric vehicles.

M&G Investments said improving earnings should help stocks in India and Indonesia continue to outperform.

Others, like T. Rowe Price, are more cautious, saying they are waiting for further signs of improvement in the world’s largest economies before becoming bullish on earnings in Asia.

“We are still in the early days and we need to monitor trends in underlying inflation and employment in the United States in the coming months to gain more confidence in the sustainability of these trends. said Haider Ali, associate portfolio manager for the company’s emerging markets discovery equity strategy in Hong Kong.

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