Asian Stocks to Gain 20% as Inflows Rise, BNP Says

Nov. 30 (Bloomberg) -- Asian stocks may extend their best annual rally in 16 years, with a regional index poised to gain 20 percent in 2010 as foreign fund flows into the region’s equities increase, BNP Paribas said.

The MSCI Asia excluding Japan Index may rise to 570 in the next 12 months, compared with the Nov. 27 close of 455.15, as inflows rise 30 percent to $35 billion, BNP strategists led by Clive McDonnell wrote in a report today. Singapore was raised to “overweight” from “underweight,” while South Korea was cut to “neutral” from “overweight,” according to the report.

“Foreign fund flows have played a key part in the recovery of Asian equity markets, with $27 billion forecast to flow into Asia in 2009,” the strategists wrote. “A surge in free cash flow and excess liquidity imply a surge in mergers and acquisitions in 2010.”

The MSCI gauge of Asian stock markets excluding Japan has gained 58 percent this year, which will be the best annual gain since 1993. BNP’s estimate of 570 will take the index to its highest level since May 2008.

McDonnell, the head of Asian equity strategy at BNP, predicted on Aug. 19 that the regional index may rise to 550 on declining risks and cost of equity, a buildup in liquidity and a return to “peak profitability” in some markets.

Capital Controls

Still, the gain in foreign funds into the region’s equity markets could increase the risk of capital controls, especially in South Korea and Indonesia, BNP said.

South Korean inflows totaled 9 percent of the economy’s gross domestic product during the third quarter, given the “undervaluation” of the exchange rate and a change in investors’ weighting in the market, the strategists said. The nation’s central bank may raise borrowing costs first, with a 25 basis point gain as early as January, they said. A basis point equals 0.01 percentage point.

Singapore was upgraded at BNP, which cited the outlook for improving asset quality and higher fee-based income at the city- state’s banks.