After Asia’s uneven 2017 share rally, laggards may draw inflows

While Asia's equity rally this year has been uneven, fuelled by a few large cap and technology stocks, analysts believe money will start flowing into shares that have been overlooked.

Thomson Reuters data shows that the biggest 10 percent of listed Asian companies by market capitalization have accounted for 70 percent of this year's rally, with technology and financial stocks seeing the biggest gains.

"The narrow rally of 2017 left behind many laggards" including good quality companies that money could switch into, said Manishi Raychaudhuri, AsiaPacific equity strategist at BNP Paribas in a note.

Raychaudhuri has a list of 26 "quality laggards", which is skewed towards materials and commodities counters. Included on it are Adaro Energy, CNOOC (0883.HK>, Siam Cement and Lotte Chemicals.

In spite of Asia's share rally, regional markets have lower valuations than some others. The 12-month forward price-to-earnings ratio of MSCI Asiaex-Japan is 13.4 times, less than MSCI United States' 18.7 and MSCI World's 16.3, according to Thomson Reuters data.

In contrast with this year's rally, which was on the back on strong earnings revisions of large-cap firms, next year's earnings estimates favour mid and small-caps, the data shows.

Over the past month, analysts have revised up mid- and small-cap firms' 2018 earnings by 3.5 percent, while large-cap firms' earnings projections have been increased up by just 0.4 percent.

"We think there are good opportunities in small, mid and large caps," said Sanjiv Duggal, head of Asia-Pacific and Indian Equities, HSBC Global Asset Management.

"Versus benchmark, we are currently overweight mid-caps and underweight large caps."

Duggal said he takes a positive view of mid- and large-cap companies in sectors such as consumption, technology and insurance as well as those with a presence in South Korea and Indonesia.

Among small caps, Duggal prefers companies that will benefit from consolidation, supply-side reforms, electric vehicle adoption, alternative energy and anti-pollution policies.

In general, South Korea, China and Taiwan have been the major beneficiaries of this year's rally, and Southeast Asian peers have lagged.

Malaysia, Indonesia and Philippine equities have had gains of less than 20 percent gains in 2017 against Asia's average of 27 percent.

Southeast Asia is "underowned and although the economies benefit from global trade, their respective indices fail to reflect the international revenue portion adequately", said Sean Darby, chief global strategist of Jefferies in a note.

So far this year, MSCI's broadest index of Asia-Pacific shares outside Japan has gained nearly 30. The only sustained slip was between Nov. 24 and Dec. 6, and that was for a cumulative 4.4 percent.

MSCI's Asia Pacific technology index, which surged more than 60 percent this year until mid-November, has fallen more than 6 percent since then.

"We do not think that this pullback in growth stocks is an opportunity to re-enter the winners of 2017," Mixo Das, strategist at JP Morgan said in a note.

"Instead, we believe this is the beginning of a significant market rotation – which has inevitably been a bit disruptive." (Reuters)