Bernstein warns rising U.S. yields still pose an underpriced risk to Asian stocks

Rising U.S. bond yields could pose a bigger threat to Asian equities than current price-to-earnings ratios suggest, with Bernstein warning that investors may be underestimating the risk of further valuation compression as the U.S. 10-year yield approaches 5%.

Since 2022, higher nominal and real U.S. yields have weighed materially on Asian equity valuations. The pressure has been partly offset this year by the artificial intelligence rally, but Bernstein said the June-July unwind removed some of the market’s most extreme valuation excesses without fully eliminating the risk from higher rates.
The concern is particularly important now because the U.S. 10-year Treasury yield is already close to 5%, a level Bernstein says is not fully reflected in Asian equity valuations. The brokerage noted that the only periods when the yield moved above 5% – around 2000 and 2007 – were accompanied by sharp multiple compression.

At first glance, Asian stocks do not look expensive on forward P/E ratios because strong earnings have lifted estimates.

But Bernstein said that masks several vulnerabilities. Earnings expectations are at record levels in South Korea, Taiwan, Japan and Thailand, raising the risk that earnings growth could peak just as borrowing costs rise.

Book-value valuations tell a less comfortable story. South Korea and Taiwan remain at record price-to-book multiples, while Japan and Australia trade above their 2021 peaks. Bernstein also said the gap between earnings yields and bond yields – effectively the compensation investors receive for taking equity risk over bonds – is close to record lows in Japan, South Korea, Taiwan and Australia.
Why tech may still be vulnerable
The AI trade has made the rate question even more important. Bernstein said Asian technology stocks trade at about 23.6 times forward earnings, around their five-year average, making them appear reasonably valued on that measure. But price-to-sales ratios remain at record highs, leaving the sector vulnerable if bond yields rise further.

The historical evidence also favors shorter-duration stocks when yields rise. Since 2020, Bernstein’s short-duration portfolio has delivered a 10.9% annualized return, compared with 8.9% for long-duration stocks and 10.1% for the broader market.

Long-duration shares, which are typically more sensitive to discount rates, have also generated about 9 percentage points of annual underperformance versus the market since 2020, while short-duration stocks have outperformed by about 5 percentage points.

There is a potential exception. Chinese equities could benefit most from higher yields, Bernstein said, because they feature prominently in its short-duration basket.

Inflation adds another layer of risk. Bernstein noted that inflation is already above official targets in South Korea, India, Australia and the Philippines, while it expects inflation to rise this year in several other Asian economies.

Meanwhile, U.S. real yields are already at their highest levels of the past 15 years, meaning another increase could have an unusually large impact on Asian markets.