Asian Stocks May Rise 29% in 2010, Credit Suisse Says (Update1)

By Shiyin Chen
Dec. 1 (Bloomberg) -- Asian stocks may rise a further 29 percent in the next 12 months because the region is still undervalued and corporate earnings will continue to recover, according to Credit Suisse Group AG.
The MSCI Asia excluding Japan Index may climb to 600 in the period, Credit Suisse analysts led by Sakthi Siva said in a report dated yesterday. They said investors should "overweight" South Korean, Indonesian, Indian and Hong Kong- traded Chinese shares, and favor so-called cyclical stocks over defensive shares.
Credit Suisse is the second-most optimistic among four brokerages that have released predictions for the MSCI regional index this week. Its forecast will take the gauge, which yesterday rose 2.2 percent to 465.03, to the highest level since January 2008. The index has rallied 61 percent this year.
"It is not only sales growth assumptions that are conservative, but also assumptions on EBIT margin in 2010," the analysts wrote, referring to earnings before interest and tax.
"The global recovery has started to broaden from fiscal stimulus to domestic demand."
Siva, Credit Suisse’s regional strategist, had predicted on July 27 the MSCI index may rise to 500 in 12 months because Asia was in a "sweet spot" of earnings upgrades.
Goldman Sachs Group Inc. yesterday predicted that Asian stocks may offer returns of 36 percent in dollar terms next year, with the MSCI Asian ex-Japan index climbing to 650 by December.
BNP Paribas has an estimate of 570 for the gauge, while Citigroup Inc. predicts that the measure may rise to as much as 540.

Valuations

Credit Suisse’s own Asian Six Factor Valuation Indicator, which tracks measures such as price-to-earnings multiples and dividend yield, shows that the region is 20 percent undervalued, Credit Suisse analysts said, citing its so-called bottom-up earnings growth forecast of 23 percent next year.
Using a "top-down" estimate of a 30 percent increase in earnings per share, the region moves to being 26 percent undervalued, according to its model, the brokerage said. It said the region was 53 percent undervalued at its lows in October 2008.