Asian stocks soar - but it's a false start

Bullish sentiment is "sloshing over" Asia, says Brett Williams of BNP Paribas. Early this week the MSCI Asia ex-Japan index jumped to a seven-month high after gaining about 35% since global markets hit their lows in March. A recovery in global risk appetites has helped. Meanwhile, the news that last month China's PMI gauge of manufacturing registered its second successive reading above 50 indicating expanding activity has provided further evidence of economic stabilisation in the Middle Kingdom.

In Taiwan, the main index gained 12% in two days on hopes that China's first investment since 1949 a stake in a local telecoms group will eventually herald a wave of such deals. Investors were also cheered by news this week that 13 countries have agreed to set up a $120bn emergency fund to offer emergency balance of payments support to countries hit by capital flight, a hallmark of the 1998 Asian crisis. "A step in the right direction for Asia to wean itself off dependence on the West," says Williams.

Investors have also taken note of Asia's encouraging long-term outlook. The region's banks largely avoided toxic debt. Unlike many Western countries, Asia has also been "able to afford stimulus without going into significant debt", says Al Clark of Schroders. Not only is government debt low, but household borrowings as a proportion of GDP range from 3%-70%. That compares well to over 100% in Anglo-Saxon countries, so it should be possible for the region gradually to bolster consumption and rely less on exports.

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Nonetheless, it's far too soon to talk of Asia "springing back to life", says Capital Economics. A gauge of Thai manufacturing production, for instance, beat estimates by dropping 15% in March a better result than February's 20% slide. Meanwhile, Korean exports fell by 19% year-on-year in April; "still awful", but at least "things have stopped getting worse; they were down 25% across the first quarter". Korean GDP edged back into the black between January and March, gaining 0.1% (after shrinking by 5% in the previous three months), thanks to government spending and lower interest rates.

But high unemployment will put the brakes on a rebound in consumption. Also, says Citigroup, for most of Asia manufacturing output is only stabilising or bouncing around at 16%-33% below seasonally adjusted output peaks. Better-than-expected data aren't the same as "out of the woods". Only in China can we legitimately talk of "green shoots", and China can't "carry the region".

Korea's finance minister noted this week that "a full-fledged recovery" in Korea depends on "a full recovery in the global economy", and that goes for Asia as a whole. The western financial system is far from fixed, while debt-soaked American consumers are gradually rebuilding their savings, which does not bode well for Asian exports. As far as emerging markets are concerned, "everything still depends on the US consumer", says Merrill Lynch's Michael Hartnett.

Nor does it help investors that forecasts for Asia suggest a 34% peak-to-trough decline in earnings. Profits usually drop by more like 50% during recessions and this is a nasty one, notes Citigroup. As for valuations, the price-to-book ratio hit 0.9 at the nadir of the last two major recessions. It is currently still a toppy 1.5 and has only been as low as 1.1 in this cycle. Put all this together and investors in Asia seem to be jumping the gun. The conclusion has to be that this is "a bear rally vulnerable to an eventual sell-off".