“Very Close To Irrational Exuberance”: Asian Equities Break Above All-Time High As Hang Seng Clears 30,000

    Following the new all-time high in US equities, the MSCI Asia Pacific Index broke through its November 2007 peak to make an all-time high in Wednesday’s trading session. This was something we noted could happen yesterday in “SocGen: Asian Equities Are So Awesome, A China Minsky Moment Is ‘Manageable”. The dollar weakened slightly after outgoing Fed Chairman, Janet Yellen, cautioned against interest rates rising too quickly in one of her last Q&As at NYU on Tuesday evening. The MSCI Emerging Market Index hit its highest level in six years and the Shanghai Composite rose 0.5% despite the lack of a net liquidity injection from the PBoC.

    As Bloomberg notes, Asian stocks headed for a record close for the second time this month as the regional benchmark gauge surpassed its 2007 peak, led by energy and industrial stocks after U.S. equities continued their bounce from a two-week slide.

    The MSCI Asia Pacific Index rose 0.7 percent to 172.70 as of 1:01 p.m. in Hong Kong. The gauge passed its 2007 closing high on an intraday basis on Nov. 9 but didn’t hold the level. Japan’s Topix index climbed for a second day Wednesday, rising 0.4 percent, after its worst week in seven months. Hong Kong’s benchmark Hang Seng Index breached the 30,000 level for the first time in a decade, boosted by China banks and energy stocks.

    “Anyone who missed the rally probably wonders if it is too late to join the party,” Andrew Swan, head of Asian and global emerging markets equities at BlackRock Inc., said in a statement Wednesday. “We don’t believe it is.”

    The MSCI Asia Pacific Index has been driven in 2017 by heavyweight Chinese names like mega-cap Tencent, while the best performers in Wednesday’s session included China Southern (+8.7%), Hong Kong software company, Kingsoft Corp. (+11%), and South Korean conglomerate, Lotte Corp. (+7%).

    The Asian equity gauge has outperformed its U.S. and European peers this year, led by surging Chinese stocks such as China Evergrande Group and Sunac China Holdings Ltd. Tencent Holdings Ltd.’s share price has more than doubled this year, beating Alibaba Group Holding Ltd. to become the first Chinese technology stock to break the $ 500 billion market value barrier. The MXAP Index has advanced 28 percent in 2017, versus a 16 percent increase for the S&P 500 Index.

    In the midst of the equity market euphoria, Hong Kong’s Hang Seng Index, which flash smashed the day before following a burst of buying, crossed the 30,000 mark for the first time in 10 years, as Tencent continued its stratospheric rise. Ongoing southbound flows from the mainland exchanges in Shanghai and Shenzhen – via the connect trading scheme – helped to propel the rally.

    Hong Kong’s benchmark equity gauge rose above the 30,000 level for the first time in a decade as Tencent Holdings Ltd. extended its rally and Chinese financial shares climbed. The Hang Seng Index rose as high as 30,199.69 before easing back to 29,991.49 as of 2:59 p.m. local time, still up 0.6 percent for the day. Tencent has surged 22 percent this month alone, taking its market value above $ 500 billion, while Ping An Insurance Group Co. has jumped 23 percent amid optimism over its digital expansion.

    Hong Kong stock investors have had a rocky ride in the past 10 years, buffeted by the global financial crisis, the bursting of two different Chinese stock bubbles as well concerns over European debt. Hopes of a sustained rally in 2015 were dashed by turmoil in mainland financial markets. This year, however, has seen sustained inflows from across the border as well as dizzying rises in technology shares. There’s little sign of worry that the gains in Hong Kong will reverse any time soon. Goldman Sachs Group Inc. sees the gauge climbing to 32,000 by the end of next year, according to a note dated today

    If the SocGen report is anything to go by, however, the thought processes of Asian equity investors are entering the realm of the irrational.

    Indeed, as Olivier d’Assier, head of applied research for Asia at Axioma told Bloomberg, "investors need to ask themselves where is the value when new highs are being reached everywhere and the risk of a trade war between the U.S. and China is increasing" adding that "we are very close to the irrational exuberance that Greenspan talked about” when he was Fed chair.  The Axioma analyst adds that "Trump will have no problem pushing through his anti-China trade agenda as Republicans and Democrats will support it due to upcoming term elections" and warns that "investors have started ignoring many fundamental relationships over last six months even as nothing has changed."

    As we emphasised, were China to suffer a “Minsky moment”, it would definitely not be “manageable”. With the Turkish Lira looking like it might go “bidless“, perhaps the next EM crisis starts there.

    In the meantime, with sellside forecasts for the next year dropping like flies, Bloomberg summarizes a range of analyst outlooks about Asian equities, in the near and not so near future:

    Timothy Moe (analyst at Goldman Sachs Group Inc.)

    • Earnings growth has been the main driver of the gains this year for MSCI Asia Pacific ex-Japan Index, according to a report published Wednesday
    • Corporate profits, which accounted for 19 percentage points of the index’s 30 percent advance so far this year, will also push stocks higher in 2018
    • “Macro growth should remain firm, driving a 14 percent rise in profits”
    • The second half of 2018 could bring challenges as central banks around the world scale back stimulus

    Mark Matthews (head of Asia research at Bank Julius Baer)

    • Asian markets will continue to go up given the perpetual correlation with U.S. stocks and there’s no reason for U.S. to enter a bear market
    • Expects investors to allocate more money in China
    • Investors were too bearish on China in the past, but the country’s rapidly ascending IT sector and its reforms are turning the nation to a "core" bet to fund managers
    • China is also the cheapest market in Asia, which is the only one trades less then 10 times 2018 earnings

    Hao Hong (chief strategist at Bocom International Holdings Co.)

    • Asia is still in a cycle of earnings improvement which will continue to support the benchmark index
    • The MXAP gauge is heavily weighted toward information technology companies which are showing strong earnings
    • Monitor growth momentum of technology giants that have been leading gains

    Cristina Ulang (head of research at First Metro Investment Corp.)

    • Rally is going to continue until 1H18 before tightening kicks in in 2H
    • Asia emerging market shares have double-digit growth in earnings, which support valuations; money will continue to be invested in Asia
    • Inclusion of mainland shares into MSCI EM Index to give the index a further boost

    Michael McCarthy (market strategist at CMC Markets)

    • The new all-time highs in the U.S. have led to a great start in Asia Wednesday and global sentiment continues to improve
    • Investors have a fear of missing out, so that momentum may continue
    • The “fragile position” of global monetary policies may be a source for shocks in 2018

    Eddie Tam (chief executive office at Central Asset Investments)

    • "Feel a bit uncomfortable" after some tech stocks jumps too quickly; bull market "is not yet over" from fundamental perspective
    • Believes funds will continue to flow into the region’s emerging markets as China’s de-leveraging and rebalancing progress will continue to support investor confidence
    • Tencent, heavily weighted in the Asia benchmark, keep a strong growth in revenue; Samsung shares also have upside given "cheap" valuation

    Nicholas Teo (trading strategist at KGI Securities)

    • Now is the time to take some profit off the table as valuations are stretched
    • Expects to see more global funds holding underweight positions in Asian stocks
    • Says “am actually negative in 2018”

    Olivier d’Assier (head of applied research at Axioma Asia Pte)

    • New high has been hit as they have elsewhere
    • “You need to partly ask yourself where do you find value when there is new high everywhere?”
    • Very close to “irrational exuberance” that then-Fed Chairman Alan Greenspan talked about in mid-1990s

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