Asia MicroStrategy:Most loved and hatedjg5566 stocks in Asia
Using our framework from Sep’16, we identify the most loved and hated stocksin Asia ex, by gauging both buy-side and sell-side sentiment. This list should bea handy guide for investors looking for contrarian asymmetric investment ideasand/or portfolio re-positioning opportunities, especially at a time when overallmarket-wide valuations are at the second highest levels since late 2010.
Our approach combines buy-side and sell-side sentiment
We continue to believe that the best gauge of buy-side sentiment is thevaluation multiples (relative to history) that investors are prepared to pay forstocks. In contrast, we measure the sell-side sentiment by reviewing analystratings over time. Whilst it is debatable how useful ‘spot’ analyst ratings are, ourapproach looks at the trend in analyst ratings rather than current prevailingratings (i.e higher proportion of positive analyst ratings over time implies positivesell-side sentiment; and vice-versa). Overall rank is based on weighted averageof the two. We have purposely avoided using institutional or foreign holding data(which, in our view, has several limitations and limited predictive power toexplain forward returns). We also avoid using analyst ‘target prices’.
Key industries, stocks where we see herding of views
Amongst large sectors, we identify the most loved areas as India Materials andAuto Sector, Korean Banks, Taiwan Semicon/Equipment and HK DivFin(HK Exchange). In contrast, our analysis suggests that the most unlovedsectors in Asia ex are India Pharma and Software sectors, Korean Autos,Software and Semiconductor sector (largely Hynix) and Singapore Banks.We note that whilst Hynix has significantly outperformed on a YTD basis, thiswas supported by faster earnings upgrades rather than multiple expansion,keeping current multiples under ~1stdev below historical averages. A bigger listof key country-industry groups is in Fig 1. Relative to our Sep-2016analysis, wefind that Asian Banks (ex India) appear much less hated currently; whilstsentiment on Korean household/personal products has turned almost 180degrees from being most loved to largely hated by the Street.
We list 44ultra-large caps from the region where we see significant herding ofviews on either side (see figure on left panel). Fig 2and 3provide a larger list ofstocks with market cap>US$3bn. Full list is available on request.
High market valuations could cause investor re-positioning
Being ‘consensus’ does not necessarily imply risk of underperformance. Indeed,we believe that some bullish herding can be justified by stronger fundamentals(eg Tech sector). However, with market valuations appearing rich relative tohistory, there is always a risk that investors may be tempted to en masse rotatefrom the leaders into the laggards. Another risk is low implied vols (barring lastfew days) and declining intra-sector cross-correlations that are at multi-yearlows. In some ways, current positioning resembles Sep-2016when Asia ex (exfinancials/resources) was trading at multi-year high multiples (15.3x –highestsince 2010) vs current ~14.8x (second highest). If a similar scenario plays out,the most LOVED stocks will likely underperform the most HATED. Indeed, thethree months that followed last Sep saw the MOST LOVED stocks underperformingthe MOST HATED by almost 10% (Fig 12). That said, the LOVED stockseventually managed to recover most of the underperformance one year out.
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