Bank of America believes the US will tip into a recession, and that could have spillover effects on other regions — including Asia. “In the past seven US recessions since 1973, Asian equities fell by an average of 50%, and [earnings per share] contracted by 30%. Both shallow and deep recessions were awful for Asia,” Bank of America’s strategists, led by Ajay Singh Kapur, said in a note dated Jul. 18. The bank is expecting a “shallow” US recession, where gross domestic product will contract by around “While China’s influence on the Asian economy/markets has raced ahead of the US in the past 40 years, a US recession remains very bad news for Asia/Emerging Markets (EM) equities,” Kapur added. The bank noted that Asian equities have lost about 34% of their market value in this cycle, while EPS growth is down just 6%. History also suggests that Asia’s price-to-earnings multiples could compress by another 20% if the bank’s forecast of a mild recession comes true, according to Bank of America’s analysis. “There is no way to sugar-coat the message for Asian and EM equities — markets, multiples and EPS growth all have downside,” Kapur said. Stock picks to reflect ‘cowardice ‘ So how should investors position in such an environm ent? “We reproduce our 26 stock defensive, high quality basket of names – BofA Buy-rated large stocks (market capitalization above [$10 billion]) with low price and earnings volatility, high profitability and high dividend yields – that reflects our cowardice, and need to survive beyond the trough,” Kapur said. The stocks named by the bank have five-year price and earnings volatility that rank in the A host of financial stocks turned up on the bank’s screen. In addition to the above criteria, these stocks have return on assets — a profitability metric The screen also turned up several non-financial stocks that have positive free cash flow and are expected to have return on equity in excess of 10%. China Shenhua Energy is one of just three energy stocks that made the bank’s list. The stock has returned 41% this year in US dollar terms and is expected to grow EPS by 33. 2% this year, according to Bank of America estimates. Singapore’s telecommunications giant Singtel also made the screen. Bank of America believes the company will grow EPS by 39.1% this year. The stock has returned 9.6% year-to-date. Other stocks that made the bank’s list include Taiwanese electronics contract manufacturer Hon Hai Precision , Australian telco Telstra and Chinese electrical appliance manufacturer Midea .
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