Using football analogies, Citi says the game of equity markets in Asia ex-Japan has reached half time and gets 10 minutes to contemplate what to do in the second half. Looking at the weak performance, particularly in May, few will be defending the gains so far, so the second half is more likely to be about beating the opponent called benchmark, the bank argues in a research note.
The market will decrease further in the coming weeks but will rebound after the summer, helped by attractive valuations and abating concerns about global growth. Risk tolerance will be restored and liquidity will be going back to real estate, insurance and industrials, which investors stayed away from during the economic downturn, according to Markus Rosgen, the bank's regional strategist.
"The market will bottom out over the summer. We are not quite there yet but we are certainly close to the bottom," Rosgen told FinanceAsia in a phone interview yesterday. The current decrease "is an adjustment rather than a double dip", he said.
Equity markets, including China which is the worst performing one in the region, will bounce back and the MXASJ index (also known as the MSCI All Country Asia ex-Japan index) is expected to climb 10% to 15% to hit the 520 to 540 level in the second half of this year, according to Citi.
After a traumatic two years in the Asia ex-Japan markets, some stocks are perceived as risky trades at very attractive valuations as a result of being oversold by risk-averse investors; while others are overvalued for being considered as stable and defensive bets. The bank will move its votes to the cheaply traded stocks and suggests it is time to add risk in portfolios.
One sector that is becoming attractive is real estate. From a valuation point of view, real estate plays are currently trading at 1.1 times book value, compared with their historical average of 1.2 times, so are at a small discount to the average.
"The big headwind for real estate is when the dollar is strong and real estate is weak. Now that the dollar has rallied a lot, we don't expect it to rally that much further in the second half of the year (and) we think real estate deserves a second look," Rosgen said.
Some other sectors will also offer value. Technology is not expensive and banks are trading below average valuations, Citi argues.
The overvalued equities can be found among Asian consumer stocks, which are trading at 2.4 times book value -- more expensive than their historical average of two times.
Meanwhile, Citi expects telecom plays to underperform when the stock markets improve. "At the moment, we are overweight telecom but it will become a lot less defensive over the course of the summer," said the bank, noting it will take telecom from overweight to underweight.
For the near term, the correction is still on. There will be another weak results season which will drag down the equity markets slightly further as analysts revise down their earnings forecasts. Negative factors include wage increases in China that will hurt company profit expectations; and the cost of raw materials, which has increased substantially over the past year and will eventually be passed on to end consumers.
Stocks in Asia ex-Japan are now trading at an average of two times book value, but a slide to 1.6 times is not impossible, the US bank said. That will be an opportunity for investors to buy equities at bargain prices when the autumn is approaching.
That is to say, investors need to catch cheap stocks and acquire risk. Citi certainly assigns lots of homework for the summer.