Earnings in Asia to fall 20% next year: Merril Lynch

Mark Matthews, Chief Asia Strategist, Merrill Lynch, expects earnings across Asia to fall by at least 20% next year year-on-year. Consensus forecast a 10% earnings growth for Asia next year. He, however, said it wouldn't have an adverse effect on markets. "The markets are virtual, whereas the economy is real. The markets have already discounted this [earnings]. I don't mind the fact that analysts are still far too high because the market is much smarter and has already efficiently discounted the recession that we are going to experience next year."

Q: What's the prognosis for most global markets or Asian markets in specific for the next few months?

A: We are in what I'd call a 'no man's land'. The expression dates to the First World War when the Germans and the British were on the opposite sides of the battlefront and none of them could go to the middle. So we are just lost right now. We already jumped so much that the hardest part of the bounce is over.

On the other hand, things are definitely getting better in terms of the credit and the money markets and the heart attacks that we experienced in the global credit and money markets in September and October has happened. We are now in a recovery phase. So putting it all together, we trade sideways.

Q: Do you think it's conceivable that we have much more of a pullback into the end of this year or do you think most of it is done in the sharp pullback that we saw at the end of October?

A: If we retested the lows, I wouldn't be surprised but I would be surprised if we went below the low of October 27 for Asian markets. That's because the confidence now is much stronger than what it was then and people will buy if we get to those levels. The markets will go sideways but I would have more of an upward bias on the market than a downward bias. Actually, there are more reasons to believe that the markets will be higher at the end of the year than lower.

Q: While the credit market has improved with Libor easing considerably, what is disturbing is to see the kind of earnings numbers which are coming in from the large companies in the US. How long do we need to see these kinds of earnings numbers and how much of the pain has the market already discounted?

A: The first part of the question is what earnings would actually be. We have to bring these numbers in much further. The consensus is still forecasting around 10% of earnings growth for next year in Asia but I forecast earnings across Asia will fall by at least 20% next year year-on-year.

The second part is what the markets will do and that is an entirely different question. The markets are virtual whereas the economy is real and the markets have already discounted this. I don't mind the fact that the analysts are still far too high because the market is much smarter and it has already efficiently discounted the recession that we are going to experience next year.

Q: Where would you categorise risk aversion at right now? If the call is that most markets are going to get ranged, do you think that implies? Some money will start get put in or is equity market participation as well still frozen up?

A: The returns are much better than bonds but that doesn't mean equities go down but what it does mean is that the risk reward is still much better in bonds and in corporate bonds than in equities. A lot of money which was recently reallocated away from Asia and away from Europe to America will remain there in the expectation that the democratic administration will try to boost the economy in the United States before the mid-term elections in November 2010. So I think when you added a lot, the risk reward of Asian markets is in a relative sense still not that favourable.

Q: How would you drill down that earnings drop that you foresee in Asia to India in specific and do you think it stands out better or worse amongst others?

A: In India, the good part of earnings next year will come from one single company, and that is Reliance. If you take that out, India's earnings growth is pretty much in line with the rest of the region. I would not call it an exceptional in any way.

Q: You are saying ex-Reliance, Indian earnings will fall roughly 20% in FY10 compared to FY09, let alone growth?

A: I haven't drilled it down to the countries but what I will say broadly is that earnings growth across Asia will be negative next year and by extrapolation, therefore I cannot believe that it will not be [negative] in India as well.

Q: The Chinese stimulus package which created quite a bit of excitement across the world yesterday, how material is that in restocking demand and how long will it take before it has any kind of material visible impact in the commodity complex or even demand?

A: The package was actually a repackaged package so they have done many things and they have just wrapped them together and announced a big package which we knew about in various bits and pieces in a longer way. Putting it all together, the message that I would communicate to you from China is similar to that old expression they use in the US: Don't fight the Fed. So, in this case, don't fight the PBOC - The People's Bank of China. They have clearly stated their intention to shift to a pro-growth policy to combat the global slowdown which will hit China much harder than India because exports in China are twice as important for the whole economy as they are for India. I would also add that the package was not nearly as important as something which was very quietly announced about a month ago from [Chinese] President Hu Jintao - that farmers will be allowed for the first time ever to sell their land and that has far great implication on the world economy than a stimulus package but it will also take longer to play out.