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Legg Mason: Legg Mason: A Sweet Spot For Asian Markets

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19 Feb 2019

Legg Mason: Legg Mason: A Sweet Spot For Asian Markets

Price-to-book ratios for Asian equities are well below the long-term average, even after January's bounceback in valuations.

Several factors are making Asian stocks increasingly compelling right now. In my opinion, these indicate we are potentially nearing a sweet spot in terms of company earnings outlooks, macro improvements and current valuations, and here is why:

Improvements in earnings revisions

Firstly, the latest earnings revision ratio for Asia ex-Japan has notably bounced, with analysts downgrading at a slower pace. Why is this significant?

It means that while earnings estimates are still falling (reflecting a still softer economic backdrop), the rate of downward revisions to estimates is easing, indicating that earning expectations could be in the early stages of a trough. This improvement in the earnings revision ratio has actually happened sooner than expected – I had originally envisaged this for the end of the first quarter 2019 – and for me this is now a potential buying signal.

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