Asia Stocks’ July Track Record a Positive Sign for Bulls

(Bloomberg) -- Investors betting on a second-half rebound for Asia equities will take comfort from July's track record over the past decade.

The benchmark MSCI Asia Pacific Index has averaged a gain of nearly 2% in Julys going back to 2010, according to data compiled by Bloomberg. It's on average the second-best performing month of the year behind October and has a positive “hit-rate” of 80%, the data show.

The month serves as an island of gains in an otherwise fairly accurate depiction of the investing adage “Sell in May and go away” when it comes to Asia Pacific equities.

July is bookended by the two worst months of the year for the index in May and August, with average declines of a rough 3% each. June and September show average gains of less than 0.3% over the past 10 years.

Manufacturing Recovery

One cause for optimism in the second half is the nascent recovery in manufacturing in Asia, said Mark Haefele, chief investment officer with UBS Global Wealth Management in a July 1 outlook.

China Factory Outlook Brighter in June as Recovery Continues

Headline manufacturing purchasing managers' indexes “improved sharply across the board” in June led by China, which bodes well for the export-dependent Asian region, he said.

“Given our view of a likely strong economic rebound in second half 2020, solid earnings recovery starting from third quarter 2020 and attractive valuations, we see strong opportunities in Asian stocks,” he said.

Still, weighing Covid-19 in any second-half outlook remains a challenge. While the Asia Pacific index has already rallied 31% from its March 23 low, the benchmark has yet to recover all of its losses for the year.

While major markets in Asia including China, Japan and South Korea have largely kept infections under control after the initial outbreak of the virus, concerns remain over a potential second wave as economies reopen and cases continue to rise around the world, including the U.S.

Investors are also facing increased uncertainty in Hong Kong after a sweeping new national security law has come into effect, raising questions about the city's future as a financial center.

“The striking disconnect between financials and fundamentals leaves the question of whether the economy recovers quickly enough to catch up with financial markets, or whether financial valuations correct toward fundamentals,” economists with Citigroup Inc. including Pernille Henneberg said in a July 1 report.

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