Calling the top in financial markets is never easy. Asian stock and bond markets may appear frothy at their near-record levels after a multi-year rally, but global investors are still betting on a mix of healthy returns and history to juice up their profits.
Six years since the global financial crisis spurred a relentless pursuit of yields, Asian stock markets are at record highs, bond yields have tumbled to pre-crisis lows and companies are raising huge amounts of cheap equity and debt.
Brisk corporate earnings growth, fed by a global thirst for the region's exports of cars and electronics goods and robust domestic consumption, has further burnished Asia's appeal and kept funds focused on ripe pickings.
"I would not at all subscribe to the idea that markets are expensive and now's the time to get out," said Julie Dickson, a portfolio manager at Ashmore Investment Management in London, a fund with $75 billion in assets worldwide.
"And if you do that, you are going to be potentially losing out on some very compelling opportunities for growth in the next 3 to 5 years and possibly longer, particularly in China and Korea."
Indeed, triggers for a correction, which seems overdue, have come and gone - ranging from geopolitics such as the Ukraine-Russia tensions or economic ones such as an Argentine debt default or periodic threats of a rise in U.S. yields.
Other regions have cooled off in the past two months. There were outflows from U.S. high-yielding bonds and equity funds, European equities have fallen sharply, and foreign cash has moved away from Latin American and European equity markets.
Asia has remained the exception, almost caught in a virtuous cycle where company earnings are surpassing expectations and bond yields offer a decent cushion for risk.
EARNINGS FLOURISH
Asian stocks .MIAPJ0000PUS are up 137 percent in just under six years. Equity markets in India, Indonesia, Korea, the Philippines and most other countries are well above their 2008 peaks, with some at record levels.
Earnings have spurred much of these heady gains, underwritten by an economic recovery led by domestic consumption and, more recently, exports. Second quarter earnings have so far on average been growing at 25-to-30 percent over the previous year.
And despite a slowing in China's frenetic growth rates, economists on average expect Asia to grow at 3 times the pace of the developed world this year - a big lure for investors grappling with uneven global growth.
The skyrocketing markets have understandably raised the risk of a sudden and sharp reversal, but those putting more money in the game make a persuasive case for staying on.
"You have to look at what earnings growth companies have delivered. And earnings in Asia over the past year or so have been broadly supportive of the move up in the market," said Andrew Gillan, Asia ex-Japan equities head at Henderson Global Investors. Henderson has $4.5 billion in Asia-Pacific equities.
No one's sure what will touch off a correction or even which part of the market will sell off first.
"We know that at some point the party is over but as a portfolio manager you are paid to look for opportunities for your clients," Hans Goetti, head of Asian investments at Banque Internationale a Luxembourg (BIL) in Singapore, told Reuters TV.
One likely trigger would be a spike in U.S. yields, possibly in early 2015 in anticipation of a rate rise by the Federal Reserve, which would cause high-yield Asian bonds to be sold. Even there, the high-yield market in Asia has been holding up well, barring some discrimination among investors on primary issues. For instance, Indonesian firm Berau Coal (BRAU.JK) postponed a dollar bond offering citing adverse market conditions.
RISK PREMIUM
JPMorgan's JACI high yield index .JPMACIGN for Asia is now around 7 percent, and that compares with a 5.71 percent yield on the U.S. high yield benchmark .JPMHYDOM. Yields on such risky Asian debt were below that for the U.S. counterparts in 2008, which means Asian bonds aren't as overvalued now.
According to Citi's Asian strategist Markus Rosgen, emerging Asia market valuations are below historic peaks, with prices on average 16 percent below the October 2007 peak and yet earnings per share now 29 percent higher than the previous peak in mid-2008.
Prices in Latin America and emerging Europe are also significantly below peaks, but the earnings growth is absent there. In the United States, earnings are above the peak but so are prices.
This higher risk premium in Asian equity prices gives investors more wiggle room, should markets turn when interest rates rise, Rosgen wrote recently.
That doesn't stop policymakers from worrying.
In a recent interview with the Central Banking Journal, India's central bank Governor Raghuram Rajan, who had also previously warned of a crisis ahead of the 2008 crash in markets, said investors were living on hope and prayer that markets wouldn't unwind messily.
"They put the trades on even though they know what will happen as everyone attempts to exit positions at the same time."
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