Historically cheap valuations will support Asian equities

RBS argues that while the upside will be capped by the debt overhang in Europe, the potential rewards for buying Asian equities now outweigh the risks.

Given the lacklustre US recovery and the debt overhang in Europe, the payoff structure for Asian markets this year is similar to writing a put option one in which the upside is capped and the downside could be substantial, Royal Bank of Scotland says in a report published yesterday.

“The eurozone crisis will likely take years to resolve and the mere presence of this overhand should cap any major moves higher in Asian markets. Simply put, the propensity for investors to overpay for risky assets seems low when the chances that things will go wrong somewhere down the road are high,” Asian equities strategist Dylan Cheang noted in the report....

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