Asian stock investors hoping for respite from five years of falling returns may have to wait longer yet as companies are hoarding cash rather than investing due to poor global growth.
The average return-on-equity across Asia excluding-Japan - hovering near 14-year lows of around 10.5 per cent - will likely slip further with the risk that investors will maintain their underweight positions for the region for some time.
"The underlying problem is that companies are not investing because of lack of opportunities and uncertainty about the outlook for growth," said Mr Herald van der Linde, head of Asia-Pacific equity strategy at HSBC. Profit margins have risen to their highest since 2011, but largely due to cost-cutting and consolidation, not growth.
Asia ex-Japan stocks have fallen almost 16 per cent in the past year with prices near their lowest since the global financial crisis. That compares with a 7 per cent drop in the MSCI World index.
About 18.4 per cent of Asia ex-Japan companies' total assets was in cash and short-term investments, the highest since at least 1994, an analysis of over 600 Asia ex-Japan companies by HSBC showed. Fixed asset investment fell to 36.2 per cent of total assets, the lowest over the same period.
Weak global growth has kept the lid on corporate investments. The World Bank recently cut this year's global growth forecast to 2.4 per cent from 2.9 per cent estimated in January, while the Asian Development Bank also reduced its emerging Asia growth forecast to 5.7 per cent from 6 per cent in December.
"There are certain areas where valuations, while low, are simply matching the low-return environment," said Mr Ian Tabberer of Henderson Global Investors.
Ironically, interest rates at multi-year lows across the region aimed at supporting growth have become part of the problem by keeping unviable businesses alive, contributing to overcapacity.
While lower rates "had the initial effect of stabilising markets, they've moved into a period where they're starting to harm the underlying economies", said Mr Mark Wills, head of State Street Global Advisors' investment solutions.
Companies with bloated cash piles typically make investors nervous as they are not investing to aid growth or boost returns. Alibaba Pictures, the media arm of Chinese e-commerce company Alibaba Group, had almost 63 per cent of its assets in cash as of Dec 31, HSBC said. Other regional companies with cash piles include Samsung Electronics, Infosys and Tata Consultancy Services, where cash and short-term investments accounted for between 30 per cent and 43 per cent of total assets as of March 31, according to Thomson Reuters data.
The obvious solutions to excess cash are to boost dividends or buy back shares. "If a company cannot find attractive investment opportunities, they should return that cash to shareholders," said Mr Matthew Vaight, global emerging markets portfolio manager at M&G Investments, adding that Asian companies tended to pay less dividends than companies in developed markets.
Investors said that for companies to invest for future growth, things might have to get worse before they can get better.