(Bloomberg) -- There is no lack of superlatives for the drubbing Asia stocks took to end February in the face of soaring coronavirus cases outside of China: Friday was the worst day for regional equities since October 2018, ending the poorest week in two years and the worst February since the global financial crisis. The speed and magnitude of the rout naturally raises one question -- when will the market find its footing?
Investors zeroed in on various metrics to answer that question. A fund manager at Samsung Asset Management is tracking the rate of new infections globally, while a strategist at Jefferies Financial Group Inc. said investors should look for stabilization in the junk-bond market. And of course, economic numbers and valuation are also closely monitored.
With low visibility on the virus spread globally, “the level of overshooting from the fundamental equilibrium likely depends on the rate of increase of infections in the U.S. and Europe,” said Alan Richardson, a fund manager at Samsung Asset Management.
Despite fewer new cases in China, infections in South Korea are surging and Japan’s tourism hotspot Hokkaido declared a state of emergency. Global financial markets saw a sudden recalibration of the damage from this health emergency to the world economy, as U.S. stocks had their fastest correction in history and witnessed their worst week since October 2008.
Things might look better this week amid speculation the Federal Reserve will cut interest rates this month and as Bank of Japan commented Monday morning that the central bank will provide “ample liquidity” to ensure financial market stability. Asia stocks were up 0.8%, snapping a seven-day losing streak. The U.S. stock index futures also turned positive after falling more than 1% earlier this morning.
Asian markets are now pricing in 10% earnings growth, said Richardson, adding that “further re-pricing down to a no-growth scenario is possible, implying 10% downside risk from here.” He’s increasing his cash position and switching out of global cyclicals and consumer-discretionary stocks -- especially tourism-related ones -- into non-cyclicals ones.
To Sean Darby, Jefferies’s global chief strategist, equity markets will only stabilize “when high-yield bonds tell them to.” Stocks will find a floor when credit markets have settled, he wrote in a note published Feb. 28, adding that “equities have been tied to the reach-for-yield theme since the great financial crisis.”
But with “significant” high-yield bond outflows, “it is too early for the MSCI All World to rebound,” he wrote.
Investors pulled $4.2 billion from junk-bond funds in the week ended Feb. 26, the most since 2018, according to data compiled by Refinitiv Lipper. And Asian dollar bonds just had their worst week in more than five years. The turmoil has sent Treasury yields to record lows as investors flee to safer assets and bets jump on more interest-rate cuts by the Federal Reserve.
If the market could have some positive economic news from countries like Japan or South Korea in the next few weeks, then it may return to normal, Colin Harte, a multi-asset quant solutions fund manager at BNP Paribas Asset Management, said by phone on Friday.
China’s official gauge for manufacturing activity contracted in February to a record low, highlighting the devastating impact of the virus on the economy. South Korea’s February exports rose for the first time in more than a year on semiconductor sales, although the actual flow of goods is likely worse than the headline figure suggests, skewed by the timing of the Lunar New Year holiday.
Should economic data and containment of the coronavirus fail to sooth investors’ nervousness, the market may “overshoot and push equity to a very low level, until people look at stocks and say ‘well, these company corrections are overdone and valuations are becoming attractive,’” Harte said.
After a nearly 9% decline this year, the MSCI Asia Pacific Index is now trading at 13 times estimated profit for the next year, falling back below its five-year average, according to data compiled by Bloomberg. The valuation has dropped to a five-month low for Japan’s Topix index and is at the weakest since August for Korean equities.
“Valuations are no guide to short-term timing, but when they are attractive they tell you there is rising potential for a rebound,” said Shane Oliver, the head of investment strategy at AMP Capital Investors.
Still, a point for debate is whether the current valuation fully reflects potential further cuts in Asia corporate earnings. While analysts have already started to undo their upward revisions from December and January, strategists at Goldman Sachs Group Inc. warned about further downside in the street consensus.
(Updates with U.S. stock futures and Asia stocks in fourth paragraph)
--With assistance from Zhen Hao Toh and Nupur Acharya.
To contact the reporters on this story: Moxy Ying in Hong Kong at email@example.com;Abhishek Vishnoi in Singapore at firstname.lastname@example.org
To contact the editors responsible for this story: Lianting Tu at email@example.com, Cecile Vannucci
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