Asian investors, in anticipation of a market turnaround in the near future, are expected to switch their holdings from high-quality companies to lower-quality ones.
'We may be getting close to the turning point when profits start to accelerate, but the evidence is not yet compelling enough to determine whether it has been reached,' said Nigel Tupper, quantitative strategist for Asia-Pacific at Merrill Lynch.
'When profits decelerate, investors tend to shift to higher-quality assets as they look towards 'safe havens' for superior returns. But when profits accelerate, investors usually shift to lower-quality, more cyclical assets. [Our] analysis . . . shows that it has clearly been the case in Asia.'
Last month, the research house introduced the Merrill Lynch Quantitative Strategy (MLQS) Indices to monitor the performance of high and lower-quality firms in the Asia-Pacific.
The indices group companies according to their S&P Common Stock ranking. These ratings, ranging from A plus to D, are based on company stability, growth in earnings and dividends over seven years. A higher grading indicates higher earnings stability and growth for the company.
About 800 Asia-Pacific companies are rated by the MLQS indices. Of the SAR-based firms on the list, Hong Kong & China Gas (rated A), Hongkong Electric (rated A), Bank of East Asia (rated A), Cheung Kong (Holdings) (rated B plus) and Hang Seng Bank (rated B plus) are among the top 50.