Asia to Meet `Perfect Storm' of Costs, Slow Exports, Citi Says

By Kyung Bok Cho

July 8 (Bloomberg) -- Asian companies outside Japan will face a ``perfect storm'' of rising commodities costs and slowing growth in export volumes, triggering earnings-estimate downgrades by analysts, Citigroup Inc. said.

Materials and industrials stocks, such as Hong Kong-listed Angang Steel Co. and Oil & Natural Gas Corp. of India, have ``lofty'' valuations and should be avoided, analysts led by Markus Rosgen said. Investors should favor technology and bank shares, and markets such as South Korea and Taiwan that have already priced in potential earnings declines, the brokerage said.

Analysts on average estimate that earnings will increase 6.7 percent this year even though the gap between Asian companies' costs and export prices is at ``a record high,'' Citigroup said.

``To assume rising earnings seems totally unrealistic,'' the analysts said in a report released today. ``Above-average valuations and negative revisions to earnings do not make for a happy stock market.''

The MSCI Asia-Pacific Index lost 13 percent in the first six months of the year, the worst first half since 1992, on concern profits will shrink as commodity costs surged and global economies slowed, damping demand.

To contact the reporter for this story: Kyung Bok Cho in Seoul at kcho7@bloomberg.net.