RPT-BREAKINGVIEWS-War will test Asia stock rally resilience pitch

By Antony Currie

MELBOURNE, March 11 (Reuters Breakingviews) - Beware the fire horse! It's usually a bad year when this mythical beast gallops onto the lunar calendar, Mohammad Faiz Azmi, executive chair of the Securities Commission Malaysia, quipped at the annual gathering of the Asia Securities Industry & Financial Markets Association in Sydney last week. The stallion, he said, last ruled in 1966, when China's destructive Cultural Revolution broke out. Granted, Faiz was making the point while referring to the U.S.-Israel war against Iran. But the superstition could also apply to the toppy-looking valuations of many of Asia's stock markets.

The region's aggregate market capitalisation has raced ahead by 40% to more than $12 trillion over the past 12 months and the MSCI Asia Pacific index trades at 2.3 times book value, both a record high, points out BNP Paribas analyst William Bratton. It's raising fears that fiery hooves, in retreat, may stomp out the rally. But Faiz and other speakers at the conference - titled The Renewed Promise of Asia's Capital Markets - stressed that the region has become more resilient.

That's in part thanks to Donald Trump. The shock of the U.S. president's yo-yoing tariff war last year spawned a willingness among regulators to discuss ideas to deepen capital markets that were previously off-limits, said Faiz, like speeding up the dual-listing process, trading depositary receipts on each others' bourses and promoting ASEAN - the Association of Southeast Asian Nations - as a regional asset class.

Trump's actions is also strengthening the trend of overseas capital flowing into major Asian equities markets, too. That increased 74% to $94 billion last year, according to Julia Leung, CEO of Hong Kong's Securities and Futures Commission. She noted that intra-regional trade now accounts for almost 60% of Asia's exports, as well as outlining how market reforms in Hong Kong have improved order execution times by 26% and reduced bid-ask spreads by 38% - though some traders, not least quants, will argue stamp duty still needs axing.

Others boasted of the rapid growth of domestic investors. Securities and Exchange Board of India Chair Tuhin Kanta Pandey highlighted that the country now has 140 million people and institutions registered to buy and sell stocks and the like, up from 19 million in 2019; around 12 million people in Vietnam, 10% of its population, now have trading accounts, said Vu Chi Dzung of the country's State Securities Commission. This captive capital eases volatility from foreign hot money flows.

Rallies elsewhere look sustainable too, not least because of the regulatory push to increase shareholder value in Japan and South Korea, evidenced by Samsung Electronics 005930.KS and SK Hynix 000660.KS on Wednesday saying they'll cancel more than $14 billion of treasury shares between them. Meanwhile, President Xi Jinping is trying to engineer a slow bull market in China including by strong-arming companies to boost dividends and buybacks - all part of a mission to reflate asset prices in the world's second-largest economy.

It's encouraging stuff. Trouble is, the tech sector, not least artificial intelligence hype, accounts for more than two-fifths of the recent rally in Taiwan and South Korea, while valuation multiples in Japan are running ahead of the improvement in equity returns, per Bratton at BNP Paribas. Without a broad-based improvement in earnings, Asia's longer-term road to resilience is likely to be pockmarked with plenty of obstacles.

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CONTEXT NEWS

Asia Securities Industry & Financial Markets Association held its annual conference on March 5 and 6 in Sydney. The central theme was "The Renewed Promise of Asia's Capital Markets".