We continue to wait

Since bottoming out on 25 August, the ASX and most Asian indices (barring China and Malaysia) have been range trading, as light intra-day leads and the ever-present thought of Fed rate hikes create indecision.

Source: Bloomberg

With about 42 hours to ‘lift-off’, ‘no-move’ or something in between, I thought I would look at how Asia currently sits on value and growth for possible trading options post the Fed meeting.

Value and growth

On a consensus basis, the only country expected to see double-digit earnings growth in 2015 is Korea. On the fill-side, Hong Kong, Australia and Malaysia are now expected to see negative earnings per share (EPS) growth by the close of 31 December. The energy sectors of Asian indices now leads all others with the highest levels of ‘underweight’ (ie sell) calls by surveyed analysts. The next on this list is materials.

On a consensus basis, earnings estimates are at six-year lows. P/E ranges have been large this year. Looking at Asian indices as a whole, the combined forward P/E is approximately 11.8 times – from a high of 13.2. On an individual country level, the P/E moves in Malaysia, Indonesia and China (to some extent) have been heavily skewed by the sell-offs caused by energy prices, risks around currency run-ons, and growth expectations. The KLCI has ranged from 16.1 times earnings to as low as 5.7 times earnings on a forward 12-month basis, but has settled back to 14.2. The JCI has ranged from 15.9 to 5.3 times forward earnings.

The April to August sell-off has created fundamental value; however, there are value traps here, and the discounts are down to macro issues or economic fundamentals. The country with the largest discount fair value P/E of all Asian indices with a 60% difference is Korea. The Philippines is the only country trading at a premium to fair value.

The ASX, on forward estimates, is trading at 14 times. This is the cheapest forward estimate since 2012, with the discounts in cyclical sectors at record lows in some instances. The ASX is trading on an 18% discount to a fair value forward P/E, so there is value around.

Although I am nervous carrying long positions into Friday morning’s Fed meeting, there are trades to be found. I expect there will be much scrambling for positions post the 4am AEST announcement.

We are calling the ASX up 42 points to 5060 as oil settles higher and US markets go long – the ‘no-move’ position is clearly gaining momentum from a market positioning point of view. However, economists remain evenly split. 42 hours and counting.

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