Less loved but good value; investors in Asia look to buy on the cheap

Thu Sep 15, 2016 10:13pm EDT
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By Nichola Saminather

SINGAPORE (Reuters) - In a world of slack growth and low returns, investors have been flocking to Asian companies with booming businesses and profits. But with these stocks now the priciest in 13 years relative to less loved firms, funds are starting to explore cheaper names.

Fundamental factors are signaling to investors that they are missing out on good value in some of the less exuberant firms.

The gap between the average price-to-forward earnings ratio of the MSCI Asia ex Japan growth index .MIAX0000GPUS and the MSCI Asia ex-Japan value index .MIAX0000VPUS is the widest since at least 2003, based on the earliest available data on Thomson Reuters DataStream. bit.ly/2cq2u85

This extreme gap has been underpinned by relentless demand for high-growth stocks as a sluggish global economy has starved investors of attractive returns. But some investors, loath to overpay for crowded trades, are turning to cheaper companies that have been overlooked and undervalued.

"We think the value gap is extreme and there are some very attractive opportunities in value stocks," said Matthew Vaight, portfolio manager for global emerging markets at M&G Investments in London.

The Asia growth stocks index is now trading at 17.3 times 12-month forward earnings, compared with its historical average of 13.7, the most expensive since the global financial crisis in 2009.

While the high multiples are a salient feature of many growth stocks, whose earnings are expected to rise faster than their industry or market average, fund managers caution investors against overlooking value stocks that usually trade at a lower price than their fundamentals suggest they should.

Indeed, the value index is significantly cheaper, at 10.1 times earnings, below its average of 10.6 times. The broader MSCI Asia ex-Japan benchmark is trading at 12.7 times earnings.   Continued...

An electronic stock information board displaying zero numbers on the latests stock prices before the opening of the first trading day after the week-long Lunar New Year holiday at a brokerage house in Shanghai, China, February 15, 2016.  REUTERS/Aly Song/File Photo