(The views expressed here are those of the author, chief

executive officer of Emmer Capital Partners Ltd.)

By Manishi Raychaudhuri

Nov 21 - It's still unclear whether the Chinese

government's efforts to revive the country's ailing economy will

prove successful, but the stimulus measures already appear to be

having one positive side effect: valuations in most Asian equity

markets have shifted into healthier territory.

Beijing began to roll out a raft of monetary and fiscal

stimulus measures in late September, including debt swaps with

local governments, cuts to borrowing rates, measures to

facilitate property purchases and policies to promote corporate

buybacks.

While the actions designed to support the property market

have yet to bear fruit, those aimed at boosting China's equity

market had an immediate impact. China's CSI 300 index spiked by

more than 30% in a little over two weeks after the announcement

of enhanced stimulus measures.

At roughly the same time, many other Asian equity markets

experienced massive outflows. In October, an unprecedented $15

billion of foreign institutional money flew out of non-China

Asian equity markets, with India and Korea accounting for more

than 95%.

This has caused Asian equity market valuations, which were

quite divergent until recently, to begin reverting to the mean.

MEAN REVERSION

This trend is best illustrated by viewing Asian equity

market valuations against the countries' respective growth

forecasts.

Based on this comparison, almost all countries have moved

closer to the regional trend line. Indonesian equities have

turned slightly cheaper since mid-August, while Thailand has

become a little more expensive. And, most notably, China's

relative position has shifted from undervalued to in line with

expectations.

India, the priciest market before the correction with a

price-to-earnings ratio of 26x, experienced the most dramatic

decline. The country's equity index, the Nifty 50, fell by 8.5%

from the September 26 peak through the end of October.

While India's equity multiple has not decreased

significantly, it has moved much closer to the trend line for

the region. That's because the "re-rating" of China's market has

pushed up the average PE multiple for the region.

HEALTHY CORRECTION

This mean reversion is healthy for two key reasons.

First, valuations are becoming more closely aligned with

fundamentals. Chinese equities, which were arguably under-owned

before September, reacted significantly to a meaningful positive

catalyst. That's exactly how markets are supposed to function.

Second, fundamentally attractive but expensive markets, such

as India, saw their premiums slashed. This should help these

countries attract more foreign investors, who have become

increasingly wary of investing in emerging markets at extremely

high multiples.

Consider the relative equity valuations in China and India.

Both markets traded at premium valuations relative to the Asia

ex-Japan average over the past 15 years: China at 20% and India

at 25%.

One could reasonably argue that India deserves to trade at a

premium to its Asian peers: it's the fastest growing Group of 20

economy, has a large liquid market with a broad range of growing

sectors, and has many companies that consistently generate

returns in excess of their cost of equity.

The question is, how much to pay for this market? Before the

correction in October, India was trading at a premium near 90%.

A figure that large likely made many foreign investors cautious.

But the relative premium has since fallen below 60%. That's

still on the high side, but the drop may be big enough to make

more foreign investors give India another look.

This is a classic healthy correction: the divergence between

valuation and fundamentals is diminishing.

CAVEAT EMPTOR

Of course, capital flows and relative valuations are not the

only drivers of investment decisions. Robust earnings and return

on capital are more vital over the long term. And most Asian

equity markets have seen average earnings estimates decline

since the summer of 2024 - some for much longer.

So even though Asian equity valuations may be more in line

with the long-term regional average, careful sector and market

selection is still warranted.

It also remains to be seen whether the recent correction

will prove durable. The Chinese equity rally has fizzled over

the past month, likely because investors believe more direct

fiscal stimulus is needed to boost consumption in the country.

If Beijing responds with more stimulative firepower, the

initial beneficiaries may be investors seeking to find value

across the region.

(Writing by Manishi Raychaudhuri; editing by Anna Szymanski and

Andrew Heavens)