Hong Kong, Asian stocks on flash sale as valuations slide as fast as during European debt crisis. The rebound may be swift

Yujing Liu

Hong Kong and Asian stocks are cheapening at the fastest rate in nine years as investors dump blue-chip companies in panic amid the global coronavirus pandemic. The rebound may be swift, going by history.

The average price-to-earning ratio of the Hang Seng Index fell to 9.5 times from 12 times over the past two months, the steepest pullback since August 2011, when the European sovereign debt crisis sparked a global stock market rout, Bloomberg data shows. The multiple for companies in the MSCI Asia ex-Japan Index dropped to 14 times from 17.5 times, reflecting the same speed of erosion in valuation.

The losses have accelerated as companies around the world cautioned about imminent dents to their sales and profits. In Hong Kong, it was preceded by anti-government protests and a technical recession through late last year. Firms ranging from carrier Cathay Pacific Airways to the rail operator MTR Corporation and the city’s largest developer Sun Hung Kai Properties have forecast a slide in earnings this year.

“The market is overselling and fearful,” said Ken Wong, client portfolio manager at Eastspring Investments in Hong Kong. “Looking at which markets are cheap and well below their fair value, Asian equity markets in particular look very attractive.”

Fears over the widening global spread of the coronavirus have triggered a global sell-off, handing investors their worst week since the global financial crisis. While the Hang Seng Index saw its worst weekly loss in more than two years, the slump in the broader Asia ex-Japan market was unmatched since the collapse of Lehman Brothers Holdings in 2008.

“A valuation crisis is playing out,” said Andy Wong, multi-asset senior investment manager at Pictet Asset Management. “Markets cannot properly price risk with fear and uncertainties taking hold.”

Capital markets will only be able to price in proper economic disruptions and turn away from undifferentiated panic selling when governments adopt strong, coordinated measures to contain the spreading virus, Wong said.

How passive investors are exacerbating stock market rout

Central banks and governments across the globe have started to roll out emergency measures to counter the economic impact of the pandemic. The Federal Reserve took emergency action on Sunday to slash its target interest rate to near zero and buy US$700 billion worth of Treasury bonds and mortgage-backed securities.

Hong Kong’s monetary authority on Monday followed the Fed to trim its key interest rate. China’s central bank acted on Friday to cut its key rate, a move that injected 550 billion yuan (US$78 billion) worth of liquidity into the financial system.

Investors could take advantage of the beaten-down valuation levels to bottom fish and build up long-term investment positions, some analysts say.

The 2003 Sars (severe acute respiratory syndrome) outbreak, the previous public health care crisis, lasted about five months, according to the World Health Organisation. For stocks, it could be shorter. The last time Hong Kong and Asian stocks fell at this speed in 2011, it took them four months to return to their pre-crisis levels.

“We are close to the bottom, if not already [at the bottom],” said Kevin Leung, executive director for investment strategy at Haitong International Securities. He recommended internet stocks, companies related to the 5G mobile network development, and Chinese banks and insurers.

David Chao, global market strategist for Asia-Pacific at Invesco, sees opportunities emerging among risk assets including Chinese and US stocks, as he predicts a V-shaped recovery in the world’s two largest economies, helped by monetary easing and fiscal stimulus.

“For investors with longer term horizons, it makes sense to start sniffing out those bargains,” he said.

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