Asian and emerging markets stocks are likely to double in the next two years or so, according to Ajay Kapur, Asia-Pacific and emerging markets strategist at Bank of America Merrill Lynch, a division of Bank of America Corp. (BAC), as reported by Barron's.

The rally in Asian stocks has been led by big names in technology, notably Alibaba Group Holding Ltd. (BABA), Tencent Holdings Ltd. (TCEHY), and Samsung Electronic Co. Ltd (005930.South Korea). Their shares are up for the year-to-date through November 20 by 114%, 125%, and 53%, respectively.

The price change for Samsung is expressed in the South Korean currency, the won. Those for the other two are in U.S. dollars, per the price moves in their U.S.-traded ADRs​. Kapur is quick to add that the median stock in the MSCI Asia ex-Japan Index is up 19%, including dividends, and 14 of the 24 industry groups are up by at least 25%, indicating a broad-based advance.

Valuation Comparisons

Samsung has a trailing P/E ratio of 11, and Alibaba's is 58 per Bloomberg Markets. Tencent's is 63, per Yahoo Finance.

By comparison, as of November 17, the S&P 500 Index (SPX) had a trailing P/E of 24 and a forward P/E of 19, per The Wall Street Journal.

Meanwhile, for the MSCI All-Country Asia ex-Japan Index, the trailing P/E was 16, and the forward P/E was 13 as of October 31, per MSCI.


TCEHY data by YCharts

​​Rally in Early Stages

Looking back at the last 40 years of history for these markets, which exclude Japan, Kapur notes that there have been six bull markets lasting an average of 42 months, with an average gain of 230%. The current bull market is only 22 months old and is up just 60% so far, suggesting to him that there's a lot more upside potential.

In 2017, the gain for the MSCI Asia ex-Japan Index is about 30% year-to-date, while earnings are up 22%, he says. Thus, he indicates to Barron's that recent share price gains in these markets are largely due to strong economic and business fundamentals rather than increased valuation multiples.

Moreover, he indicates that purchasing managers' indexes in 87% of the 38 countries from which he gets such data are registering economic expansion, the best showing since 2011.

BABA Chart

BABA data by YCharts

​Drivers of Gains

Globalization and technology are driving the big gains in Asian stocks, as Kapur tells Barron's. Weakness in the U.S dollar also is a big plus, and he expects the Federal Reserve not to be very aggressive in reducing its balance sheet. The upshot is that increases in U.S. interest rates should be moderate, if Kapur is correct. This is significant since the value of the dollar typically rises as U.S. interest rates increase. He says the Fed has overestimated inflation and growth, leading to overly-aggressive expectations for future interest rate hikes.

With Chinese companies, Kapur believes that investors underestimate their pace of technological innovation. Additionally, he says, less stringent data privacy rules in China allow these companies to harness advances in big data and artificial intelligence (AI) more extensively than their rivals elsewhere around the world. Chinese stocks as a whole are trading at around 17 times trailing earnings, he says.

South Korean companies, in his opinion, offer very strong earnings momentum, very reasonable valuations, and low financial vulnerability. The forward P/E of about 9 is at a significant discount to the region's multiple of 13. As a major trading nation, South Korea is a big beneficiary of global economic expansion, he adds.

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