You might think that investing in the fastest-growing regions of the world would have been a profitable strategy over the past year. Sadly for those who acted on that conviction, that hasn’t been the case, as “risk avoidance” by investors has led to waves of selling pressure in emerging markets in Asia and other high-growth regions, along with other asset classes. And it may still be too soon to venture back into the water, StarMine models suggest.

True, avoiding those parts of the global economy that have been growing most slowly – or even contracting – would have helped an investor steer clear of incurring big losses on European investments. But Asia – the region of the world that is home to some of the world’s most venerable emerging markets (such as South Korea and Taiwan) as well as some of the new global powerhouse economies like India and China – proved to be the region with the second-largest market declines over the last year. As seen in the chart below, large and midcap stock prices in Asia’s developed markets – countries such as Japan – tumbled by 8.4%; the same groups of stocks in emerging Asian markets –such as China and Thailand – slid 7.3%. The biggest contributors to this decline? Materials stocks, battered by weak commodity prices, have fallen by more than 20% during the last 12 months.

Investors tempted to buy the dips and increase their holdings of Asian large and midcap stocks at these lower valuations might want to hit the ‘pause’ button, however. The pullback may not be over yet, as the region’s negative aggregate Predicted Surprise suggests: the most recent earnings estimates by the top-ranked analysts are, on average, lower than the consensus estimates. As you can see from the chart below, both emerging and developed nations in Asia have negative Predicted Surprises, with that of emerging Asia being -1.6%. The region’s developed markets have a Predicted Surprise score of -0.6%.

It’s rare to see an entire region that has such a large negative Predicted Surprise as now appears across markets in the Asia Pacific region. While lower commodity prices have weighed on these markets in the past, looking forward it seems as if the problem for the developed economies in Asia lies in the utilities sector, which has a region-wide -22% Predicted Surprise. That can be explained by the fact that Japan is in the process of closing down the last of the country’s nuclear reactors in the wake of last year’s catastrophic earthquake, which, together with the tsunami that followed, caused a near-meltdown at a nuclear power station in Fukushima Prefecture. In Asia’s emerging economies, the large negative Predicted Surprise comes from the materials and industrial companies as well as from utilities. The largest negative Predicted Surprise in the region is for the materials sector, which has a Predicted Surprise of -5.8%. That means that analysts are likely to cut their earnings forecasts for companies in this sector still more in the coming months, as global economic concerns increase the likelihood that commodity prices may remain depressed.

Earnings estimates, especially in some economically-sensitive sectors like materials and industrials that are particularly important in emerging economies, suggesting that stock prices are likely to fall further, this data suggests. Certainly, when analysts voice warnings about earnings growth, the markets listen. In Emerging Asia (and to a lesser extent in developed Asia), the negative Predicted Surprise for the region in aggregate indicates that despite the large drop in prices over the last year, simply being patient and waiting on the sidelines may prove more profitable than bargain-hunting at this point in time.

 
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