Earnings growth peaking. Valuations still challenging. Tapering a threat.
Vaccines and growth recovery led the market from Q4 last year. Over the next six months we think the market direction will increasingly be dictated by monetary policy and Tapering. The first change in policy in the cycle is normally uncomfortable for Asian equities. We also expect Tapering and peaking inflation to drive real yields higher – not typically good for Asian stocks, and a far cry from the falling real yields story of late 2020, early 2021. On a positive note, earnings are strong but export growth is likely peaking, input costs are rising and implied ROE is back at high levels; there’s less scope for big upward revisions for 2022E EPS from here. Valuations are retracing from decade high levels in February – we see further de-rating ahead. Our year-end index target is 840 (5% downside) based on 13.7x 2022 PE (still above average valuation levels). We introduce a preliminary 2022 index target of 900, 2% upside from here.