Asian Stocks Underprice Risk from Rising US Yields, Bernstein Warns

Asian equity markets may be underestimating the threat of further valuation compression as U.S. bond yields climb, with the benchmark 10-year Treasury yield nearing the 5% mark, according to a recent analysis by Bernstein.

Valuation Risks Beyond P/E Ratios

While Asian stocks may not appear expensive on a forward price-to-earnings (P/E) basis due to strong earnings estimates, Bernstein argues this view masks underlying risks. The brokerage points to less favorable metrics, such as price-to-book valuations, which remain at record highs in South Korea and Taiwan and trade above their 2021 peaks in Japan and Australia.

Furthermore, the gap between earnings yields and bond yields—a measure of the compensation investors receive for holding stocks over safer bonds—is near record lows in Japan, South Korea, Taiwan, and Australia. Bernstein noted that the last two periods when the 10-year yield surpassed 5%, around 2000 and 2007, were followed by sharp multiple compression in equities.

Tech Sector and Duration Exposure

The recent rally in artificial intelligence stocks has made the sector particularly sensitive to interest rates. According to Bernstein, Asian technology stocks trade at approximately 23.6 times forward earnings, close to their five-year average. However, their price-to-sales ratios are at record highs, leaving them vulnerable to a pullback if borrowing costs continue to rise.

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Historical data also suggests a defensive positioning may be warranted. Since 2020, a portfolio of short-duration stocks has delivered a 10.9% annualized return, outperforming the 8.9% return from long-duration stocks and the 10.1% for the broader market, Bernstein's analysis showed. Chinese equities, which feature heavily in the firm's short-duration basket, could be a notable exception and potentially benefit from this environment.

Broader Macroeconomic Pressures

Compounding the risk from U.S. rates are domestic inflation and elevated real yields. Bernstein highlighted that inflation is already above official targets in South Korea, India, Australia, and the Philippines.

With U.S. real yields already at their highest levels in 15 years, any further increase could have a significant impact on Asian markets, which have historically been sensitive to changes in U.S. monetary policy and global financing conditions.