WASHINGTON: Asian stock markets dropped 7% in December as investors assessed the effects of Donald Trump’s presidency. Since then, they have recovered to their pre-election levels. That may be comforting, but it also could be a sign that Asian shares are overvalued by 10% or more, as some of last year’s tail winds recede and Trump’s protectionist policies are discussed. Over the past year, Asian markets have benefited from the commodities rally. Oil prices bottomed last February before more than doubling, and industrial metals like iron ore then rallied. This has prompted earnings upgrades in the previously unloved energy and materials sectors. But now the iShares MSCI Asia ex-Japan ETF (ticker: AAXJ) trades at 12.8 times forward earnings, an uncommonly high level since the financial crisis. Unless commodity prices rally further, Asia’s earnings growth could start to fade as early as this month. The reason: Commodities prices started to rally a year ago, making this year’s comparisons tougher, argues Nomura Securities’ equity strategist Mixo Das. He downgraded Asian stocks last week.
AND THEN THERE’S TRUMP, who has talked tough on trade and immigration while offering conflicting views on the U.S. dollar. Looking at historical data, Goldman Sachs estimates that a 5% decline in U.S. import growth could lead to an 8% drop in the MSCI Asia ex-Japan Index over three months. Korea’s stock market will be hardest hit, slumping as much as 12%, followed by China and Taiwan. Yet since Trump’s election on Nov. 8, the dollar-denominated iShares MSCI South Korea Capped exchange-traded fund (EWY) has gained 3.9%; the iShares MSCI Taiwan Capped ETF (EWT) has risen 1.7%; and the iShares MSCI China ETF (MCHI) has fallen, but only 0.2%. Much of the beating will be absorbed by electronics and auto makers clustered in Northern Asia. Consumers tend to tighten their purse strings when car and phone prices rise. Korean auto makers Hyundai Motor (005380.Korea) and KIA Motors (000270.Korea) are particularly vulnerable, says Goldman. About 47% of Korean cars sold in the U.S. aren’t made in the States; by comparison, the “import content” for Ford Motor (F) and General Motors (GM) cars comes to only 8% and 18%, respectively, for their U.S. sales. If Trump hikes import tariffs, U.S. consumers may start kicking the tires of more American cars.
Goldman also does not see upside for Apple Inc ’s (AAPL) Asian supply chain, such as acoustic component maker AAC Technologies (2018.Hong Kong) and camera-lens maker Largan Precision (3008.Taiwan), which have rallied 57% and 132%, respectively, in the past year. If Republicans pass a proposed border tax, Goldman reckons Apple could face an extra $4.7 billion in federal taxes this year. Currently profits from iPhones made overseas but sold in the U.S. are not taxed unless Apple repatriates the cash; under the new bill, it will be taxed when profits are earned. That could hurt investor sentiment toward Asian suppliers. India’s information-technology services industry is also at risk. Infosys (INFY) and Tata Consultancy Services (532540.India) have held up well, down 5% and 2%, respectively, since Nov. 8 and still trade at 13.5 and 15 times forward earnings, even as U.S. proposals to restrict usage of H1-B visas circulate. Both rely on visas to service U.S. clients, and revenue growth at both is slowing.
