* Asian EM stocks' correction near bottom if history a guide
* Investors don't expect a bear market but not yet ready to
* Funds awaiting greater certainty over US rates, Chinese
By Nichola Saminather and Abhishek Vishnoi
SINGAPORE/MUMBAI, Sept 14 Asian emerging market
stocks have fallen so far in the recent rout that a turnaround
would normally be imminent by historical measures, yet few
investors believe it will happen anytime soon.
The MSCI Asia ex-Japan index has slumped 24
percent since its April peak - sufficient, historically, to
entice back investors - but a range of uncertainties is keeping
These uncertainties include the timing of the Federal
Reserve's rate increase; China's slowing economy, slumping stock
market and currency devaluation; and the U.S. dollar's strength.
A sophisticated investor can measure and take advantage of
market volatility, but uncertainty fosters indecision.
"Volatility going up is not a bad thing because you're going
to make money if you're right," said Olivier d'Assier,
Asia-Pacific managing director at investment risk-management
firm Axioma in Singapore. "But with uncertainty, you can't
Many investors believe emerging Asian stocks, excluding
China, are experiencing corrections - a drop of 10 percent to 20
percent from their peak - but they are not yet bear markets
either: marking downturns of more than 20 percent lasting at
least 60 days.
It is risk aversion amid uncertainty, rather than companies'
actual performance, that has driven the sell-off, d'Assier said.
The MSCI benchmark is trading at 1.4 times book value, its
lowest in nearly three years, as foreign investors have fled
emerging markets including South Korea, Indonesia and Thailand.
In past corrections, these levels have indicated a bottom,
drawing investors back.
Cash made up 3.8 percent of Asia ex-Japan equity portfolios
at the end of July, a six-year high, according to fund-flow
tracker EPFR Global.
Asia ex-Japan holdings fell to 5.8 percent of global equity
portfolios in August, from 7.2 percent in July, and bond
allocations in global balanced portfolios rose to an 8-month
high, a Reuters survey showed.
Without the uncertainty, "the turnaround would be much
faster," said Wilfred Son Keng Po, Asia ex-Japan equities
portfolio manager at PineBridge Investments in Hong Kong. "The
contagion effect isn't sparing any Asian emerging market."
That contagion effect has led the level of correlation
between Asian stock markets to quadruple over the past four
months, according to Axioma, meaning that the benefit of
spreading risk by diversification is reduced.
Even investors who hold multiple asset classes see the
decline in diversification driving them to sell out of all their
riskier assets for cash.
Emerging markets investor FMG has increased cash to 20-40
percent of its portfolio since June by selling stocks, compared
with 5 percent normally, fund manager Arild Johansen said.
Value strategies - investing in stocks that appear
underpriced - have outperformed recently, showing bargain
hunters are returning, d'Assier said.
An Australia-based fund manager, who has also remained
sidelined, is preparing a list of opportunities. Korea and
Taiwan look attractive, on valuations and exports, he said.
Correlation has stabilised, d'Assier noted, but to get a
sharp-enough reduction in correlation between markets to drive a
recovery would first demand a much greater level of investor
A good start would be getting the U.S.'s first rate hike
since 2006 over with when the Fed meets Sept. 16 to 17.
Corporate results season in October, d'Assier added, will
also offer clarity on winners and losers, giving investors
buying options, and help boost portfolio diversification.
"In any correction, one should always look at the
investment landscape and assess what works best," said
PineBridge's Son Keng Po. "Opportunities for some stocks are
starting to emerge."
(Reporting By Nichola Saminather and Abhishek Vishnoi; Editing
by Nachum Kaplan and Eric Meijer)