Forget Profit Drops. Citi Private Bank Is Overweight Asia Stocks

(Bloomberg) -- When it comes to Asia, Citigroup Inc.'s private-banking arm is closing an eye on corporate profits.

The Wall Street giant turned overweight on the region's shares from neutral two weeks ago, even as it expects earnings for companies excluding Japan to fall 40% this year. Asia presents an “unstoppable trend” of long-term growth with stronger firms and national balance sheets than in places like Europe, the Middle East and Africa, Citi Private Bank said.

“As a consequence, these shares have fallen less in 2020, particularly in China where the collapse and recovery from Covid-19 has been first,” Chief Investment Officer David Bailin and Steven Wieting, chief investment strategist, wrote in a report on May 3.

The MSCI Asia Pacific Index lost almost 30% this year before a rebound helped it exit bear-market territory last week amid billions of dollars in stimulus. Thanks to the support of onshore brokerages, China was one of the few regional stock markets to avoid entering the bear zone, despite being the epicenter of the coronavirus crisis. Now, investors are expecting beaten-down shares to post a recovery as countries reopen, with economists at Goldman Sachs Group Inc. and Morgan Stanley seeing signs that global growth is bottoming out.

Citi Private Bank is assuming gross domestic product expansion of 1.8% in Asia ex-Japan this year, a sharp fall from 5.1% in 2019. It sees more earnings downgrades in markets including Japan and China as companies provide guidance during the ongoing results season. Still, the profit hit will likely be more muted than during the Asian crisis of the 1990s because financial institutions and systems are stronger, said Ken Peng, Citi Private Bank's head of Asia investment strategy. “History suggests share prices may bottom before the earnings do,” he added.

In terms of valuations, the Philippines appears to be the cheapest market, while Indonesia, India, Hong Kong, Singapore and China also imply double-digit returns for the coming year, according to Peng. Thailand and Taiwan, on the other hand, look expensive when comparing forward price-to-earnings ratios to their 15-year history, he noted.

The bank favors the Macau gaming industry as its service capacity is “intact,” and it is likely to see a strong rebound in visitors as soon as travel bans are lifted. It also likes stocks in the tech and telecom-services sectors, though said health care “warrants caution at peak valuations.”