HONG KONG: Corporate Asia’s rapid pace of stock buy-backs is a sign executives want to capitalize on the region’s economic promise, but any pause in repurchases could further weigh on battered markets.
The total value of share buybacks in Asia-Pacific outside of Australia and Japan has nearly tripled to $3.6 billion in January-July, contrasting with a 30 percent decline in repurchases globally, according to Thomson Reuters data.
For now the executives of cash-rich Asian businesses believe their stocks’ valuations are being depressed by global events rather than fundamental problems and a recovery in earnings growth next year should bring a pay off, analysts said.
However, investors should watch out for a steep slowdown in Asia buy-back deals unaccompanied by a recovery in the stock market or signs of a global economic slowdown has hit bottom. Ominously, that could mean that cash is being hoarded, profit forecasts will be downgraded and the bear market will continue.
Fritz Man, regional head of the investment product team at Sarasin Rabo Investment Management in Hong Kong, believes corporates will cut back on buy-backs and hold more cash in the near term.
“In the next few months, you should continue to see a slowdown. Even in Asia, China is slowing down. Buyback activity may not pick up until early next year,” he said.
Corporate earnings estimates for 2008 for Asia ex-Japan have been slashed this year to a growth of 4.4 percent from 10.4 percent in January, though the 2009 estimate is for a 15.9 percent rise, reflecting predictions for a bullish recovery, according to IBES estimates cited in a Citigroup research note.
“A slowdown in buy-backs, unless there is some dramatic external change, would be because corporate Asia does not want to run its cash reserves down any further,” said Peter Hilton, head of Asia equity research with Royal Bank of Scotland in Hong Kong.
“Earnings downgrades particularly for 2009 have got a way to go. The big picture problem is we have never had a credit crisis like this, so no one is quite sure how long it will depress Western demand.”
Hilton said monitoring the frequency and value of share repurchase deals could give investors an idea about corporate perceptions of the business environment and in turn could shed light on the market’s direction.
The total value of share repurchases for the year to Aug. 8 in Asia was $3.6 billion, up sharply from $1.30 billion a year ago.
At their current pace, the total value of share repurchases in 2008 would be the most since the start of the bull market in 2003, when corporates bought back $9.6 billion worth of shares.
Globally, firms have repurchased about $360 billion worth of stock in the year to Aug. 8, down from about $520 billion a year ago.
Shrewd strategy
The scale of repurchases is seen as a shrewd strategy by many analysts — as long as markets recover by the first half of next year without companies having to cut their profit forecasts too much.
“The pace of buybacks will depend on management’s view on the economy. So if the economy deteriorates more sharply, then the company will need to retain more cash,” said Peter So, head of research with CCB International in Hong Kong. “So far the consensus is earnings growth and economic development will improve over 2008.”
Valuations have dropped sharply since the benchmark MSCI Asia-Pacific ex-Japan equity index hit a record high in November 2007.
The index has since plunged 35 percent and hit a 17-month low last week. The ratio of stock price to book value, one way to measure relative valuation, of the S&P Asia 50 index has fallen to 2.03 times from 2.95 times in that period, the lowest since October 2006. In 2003, the price-to-book ratio hit a low of 1.43 times.
Analysts are bullish on stocks that depend on Asia’s domestic growth prospects, particularly companies linked to China.
CCB’s So favors industries that would benefit from continued infrastructure development and increases in domestic consumption in Asia.
Sarasin’s Man particularly likes Asia’s financial sector, which has proven quite resilient to global pressures. Indeed, Industrial & Commercial Bank of China Ltd., the world’s biggest bank by market value, posted a 41 percent rise in second-quarter profit on Thursday and nudged ahead of HSBC to become the highest-earning bank globally.
“I think people should use this correction to accumulate these kind of companies because domestic demand especially in China is going to replace exports as drivers of China growth over the long term,” said Man.
