Credit Suisse: Indicators point to Asian markets rebound in July

The Credit Suisse Asian equities research team is recommending its clients to take "net long positions" in Asian stocks for the month of July following the heavy sell-off last month.

The recommendations were made after six of its tactical indicators point to a rebound. These indicators are a set of 10 variables that the research team monitors for net exposure to Asia markets (excluding Japan) with a one-month timeframe to determine entry or exit points in particular asset classes in order to maximise portfolio returns.

Said Credit Suisse, "We have as many as six indicators with positive signals (this month). This is a massive increase compared to last month, where only one indicator scored with a positive signal. This is the same number of positive signals as last April where the market subsequently rose by 7.9%."

The 10 indicators were grouped under six categories: macro indicators; price technical; earnings revisions; valuations; flows of funds and seasonality.

The positive signals include that of the MSCI NJA index being oversold and undervalued; low percentage of stocks trading above their 10-week average as well as market liquidity based on net inflow or outflow from Asian equities markets.

For instance, the research report noted that "there have been only two weeks of funds inflow out of the past 10 weeks. History suggests that we should get a reversal trend in flow and market performance."

According to a separate report by EPFR Global, weekly redemptions from offshore Asian funds last month were estimated to be in the region of US$4.8 billion, the second-biggest monthly outflow in history.

The Credit Suisse report also pointed out that the percentage of stocks trading above their 10-week average was 7.2% on 27 June 2008. "History suggests this is positive, as it reflects an extreme case of a number of oversold stocks and this tends to be followed by a market rebound."

According to its quantitative analytical research, there had been seven weeks since 2001 when the percentage was below 10%. The subsequent performances from one to three months following such episodes had ranged from 6.2% to 12.6% on average.

As to its buy scorecard market-wise, Credit Suisse favours China, Hong Kong and India. "China looks particularly attractive on valuations. It ranks best on dividend yield at 2.1% and second best on price to book (P/B) values and price earning (P/E) ratios at 2.9 times and 13.5 times respectively.

"Hong Kong is the second-most attractive market, thanks to good earnings sentiment with improving earnings revisions momentum. It also ranks attractive on P/B at 1.7 times and dividend yield at 3%. Finally, India is the third-most attractive market because it looks particularly attractive on valuations."

The least attractive markets in the Credit Suisse stocks universe were Taiwan, Australia and Singapore, all of which remain expensive when it comes to valuations despite being technically oversold.

Among the stocks on the Singapore Exchange, the Noble Group was highly rated as a buy while Indiabulls Real Estate and Parkway Holdings were ranked among the ten least attractive stocks.

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