By Gaurav Dogra and Patturaja Murugaboopathy
Prospects for robust earnings growth for Asian companies in 2024 look bleak as analysts are relentlessly cutting regional companies' forward 12-month earnings estimates due to China's faltering economy, disappointing third-quarter earnings, and a rise in interest rates.
According to LSEG's IBES data, analysts cut Asian companies' forward 12-month profit estimates by 0.3% in October, the third successive month of downgrades.
"A sluggish growth recovery in China is one of the main reasons for downward earnings revisions," said Rajat Agarwal, an Asia equity strategist at Societe Generale.
"Given China is almost 40% of the Asian earnings pie, this has implications for the overall Asia earnings cycle, investor sentiment and foreign inflows."
While China's economic restart after lifting COVID-19 restrictions initially sparked a rally in Asian stocks, enthusiasm waned as the year progressed, hampered by the country's decelerating economy, a deep slump in the real estate sector, and geopolitical strains.
Prerna Garg, an equity strategist at HSBC, said earnings growth is set to slow in 2024 in most of Asia. She added that China's profit estimates for 2023 by street analysts have been cut to 18% now from 24% in August.
"This has largely been on the back of the property sector and utilities, where results came softer than expected," she said.
Uninspiring earnings for the third quarter from Asian companies have also led to reductions in their earnings projections for the upcoming year.
LSEG data reveals that 53% of Asian companies reporting thus far have fallen short of consensus estimates, with 58% having reported.
"Overall, the earnings season has disappointed Street expectations, with more misses than beats. These results have led to overall earnings downgrades," said Chetan Seth, an equity strategist at Nomura, in a note this month.
In October, earnings estimates for Chinese and Indonesian firms were trimmed by around 2%, while those for Hong Kong and Malaysia companies were lowered by approximately 1.5%.
Conversely, Indian and South Korean firms saw their projections bumped up by about 0.7%.
"Taiwan and Korea are seeing earnings upgrades given the recovery in the global semiconductor cycle, which matters the most for these two markets," said Societe Generale's Agarwal.
Minyue Liu, an investment specialist at BNP Paribas Asset Management, cautioned that normalisation in external demand, China's uneven recovery, inflationary headwinds, and geopolitical uncertainties could lead to short-term market fluctuations.
"(Yet), domestic demand and investment are likely to be the new drivers of economic growth in emerging Asian markets," she said.
"Modest valuations, light investor positioning, good fundamentals and structural long-term growth opportunities should help Asian stocks withstand near-term volatility."
(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Kim Coghill)
