ING Financial Markets forecasts that Asian stocks will rise between 20% to 30% once a clear resolution has emerged over the crisis in Iraq.
In a new report entitled The Post Iraq Trade, ING recommends investors to buy large companies across Asia, particularly brokers, airlines and technology stocks. Among specific markets, Korea and Taiwan are expected to be the biggest outperformers, while Hong Kong and Thailand will perform in line with their benchmarks, with China, Indonesia, Malaysia and Singapore underperforming.
"Markets hate uncertainty. Once we have clarity over how the major powers plan to deal with the Iraq crisis, that uncertainty will be lifted and markets will rally," says Markus Rosgen, chief strategist.
"Companies in Korea and Taiwan will be the best overall performers. In Hong Kong, we expect utilities to suffer, but real estate shares to do very well," he adds. "There is a six-to-eight week window in which to make money. And this could well be the biggest opportunity for 2003."
In addition, Asian stocks are now very cheap. ING calculates that as stocks continue to fall towards ING's target level of 155 points as measured on the MSCI Far East Free ex-Japan index, Asian stock markets will be trading at one times book value - a level that has only been reached in Asia three times since 1975. Furthermore, compared to the first Gulf War in 1991, Asian companies have far less debt on their balance sheets, making them more susceptible to an upward rally and valuations are the same today as back in 1991.
ING predicts that once the euphoria, as reflected in the "relief rally", subsides, stocks in Asia could fall back around 10%, as economic data lags behind the stock market. But ING cautions that the decline in Asian stock markets is expected to be only temporary, with the weak US dollar leading to greater export demand from Asia, helping to fuel further stock market rises in the region.
"Stocks always rally first, but confirmation that fundamental economic conditions and company earnings support the rally, always takes six-to-nine months to feed through," says Rosgen. "There will be a lot of volatility during this period as conflicting data emerges, but with the US dollar continuing to weaken, we expect there to be more demand for Asian goods and services, which will further boost performance in the region," he adds.
During the relief rally, ING forecasts Korea's Samsung Electronics, Hyundai Motor Taiwan Semiconductor and United Micro Electronics to be among the top performers and in Hong Kong, China Mobile and Hutchison Whampoa will provide investors with upside potential.