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Global Top Cat

Market Outlook: This isn’t a Repeat of 2007

By Yiannis G. Mostrous, on Aug. 1, 2014

Asia’s equity markets offer investors the best risk-reward proposition for the remainder of the year, thanks to a pick-up in earnings and central banks expanding their balance sheets.

Although the MSCI Asia ex Japan Index has climbed to about 1.58 times book value from 1.45 times at the beginning of 2014, this valuation still represents a discount relative to the regional benchmark’s 10- and 30-year average of about 1.8 times book value.

We expect this multiple expansion to continue in the back half of the year, as investors grow more comfortable with China’s economic outlook.

Given the size of China’s economy, investor sentiment toward Asian equities depends heavily on the Mainland’s ability to meet expectations for growth.

The latest data points appear to vindicate our view, expressed last fall, that China will hold its own and deliver GDP growth of 7 percent to 7.5 percent.

In the second quarter, the Mainland economy expanded by 7.5 percent year over year, suggesting that the momentum has turned. Domestic consumption, exports and trade contributed to this growth, while the real estate sector acted as a drag.

Potential credit issues notwithstanding, investors should give Chinese authorities the benefit of the doubt; in the past, the government has dealt quite capably with similar issues.

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