Bernstein: Asian equity valuations retreat, but earnings upgrades peak: Bernstein recommends balanced allocation

Which markets offer more attractive valuations after the pullback?

The fourth quarter of 2026 began weakly. Amid macroeconomic and geopolitical headwinds, the MSCI Asia ex Japan Index fell 9% from its peak, while the MSCI Japan Index fell 6%.
As of 22 October, South Korea’s forward price-to-earnings ratio for the next 12 months had fallen to 8.8 times, its lowest since the global financial crisis. China’s was 10.9 times, near its 2024 low of 10.2 times. Japan’s fell from 17 times in February to 14.7 times, slightly below its 10-year average.
The forward price-to-earnings ratio for Asian technology stocks fell from a peak of 36 times in May to 18 times. Bernstein believes that, if earnings remain stable, the valuation reset in sectors that previously led gains could catalyze a recovery in risk appetite.
The firm prefers South Korea to Taiwan in positioning for a rebound. Although Taiwan’s forward price-to-earnings ratio has fallen about 30% from its peak, valuations reflected in its price-to-book ratio, enterprise value multiples and dividend yield remain relatively high. South Korea’s valuations have reverted further.

The earnings upgrade cycle has peaked or is near its peak in markets that have performed well this year, including South Korea, Taiwan, Singapore and Thailand. Previously lagging India, the Philippines, Malaysia, Indonesia and Hong Kong have shown improvement.
Earnings upgrades have peaked in several South Korean sectors after reaching record highs, and upgrades have also peaked in Taiwan’s financial, technology and telecommunications sectors. Earnings support remains weak in most South Korean sectors, limiting the support low valuations can provide for a rebound.
In Japan, optimistic earnings expectations are at record highs across all sectors except real estate. Large-cap stocks overall have entered a period of earnings downgrades, and Bernstein expects this trend to spread to other stocks.
There is no clear sign that overall earnings downgrades in China have bottomed. Technology, financials, healthcare and energy still have support from upgrades, while downgrades in consumer and telecommunications have reached record magnitudes.

As of 22 October, momentum and growth led gains in Asia ex Japan in the first half, rising 44% and 26%, respectively. Since the start of the second half, value and high-dividend styles have risen 14% and 11%, respectively, while momentum and growth have fallen 17% and 5% over the same period.
Earnings estimate revisions for value and low-volatility styles have improved relative to the broader market, but earnings estimates for the Asian value portfolio itself are still being downgraded, and investor interest remains weak. The high-dividend style’s earnings downgrade cycle relative to the market is at its worst level on record.
Bernstein therefore retains growth stock exposure to participate in a potential rebound, while allocating to value and high-dividend stocks to capture rotation opportunities. The firm emphasizes selecting growth stocks with earnings support rather than chasing momentum.

Bernstein believes rising bond yields, inflation, ongoing conflicts and the US midterm elections create uncertainty. Equity risk premiums in Taiwan, South Korea, Japan and Singapore have also begun to rise from record lows, so the firm places diversification at the core of its allocation.
Japanese domestic demand stocks have outperformed exporters since July. The firm believes the trend has room to continue: domestic demand stocks still trade at a valuation discount to exporters, and their earnings estimate revisions are also improving relative to those of exporters.
In China, the firm favors value stocks and selected growth stocks. In India, it favors balancing momentum and quality styles.