The equity market tends to lead consensus earnings estimates, and the 19% pullback in MXAPJ from mid-April to late-May begs the question of whether current earnings estimates will remain intact. Although the equity market has recovered 14% from its lows, MXAPJ is still down 8% from its April 15 closing high, and investors remain focused on the downside risks to earnings.

Although analysis of historical precedent is limited in its ability to explain what might occur going forward, we highlight several historical events that we find most relevant to the current setup. Since 1995, there have been 3 major corrections in MXAPJ and 3 relatively minor sell-offs. The "majors" have been characterized by a 50% contraction in equity prices and sharp earnings cuts between 30-50%. The "minor" sell-offs show declines of 20% in terms of equity prices and stable EPS estimates with just 2% negative revisions.

In short, we believe the current scenario will pan out as one of the relatively "minor" contractions. In fact, the current statistics appear strikingly similar; MXAPJ fell 19% between April15 and May 25, while earnings estimates (so far) have declined a modest 2% (see Exhibit 16).

In terms of a recovery, the "minor" corrections show mixed results. The market recovered just 5% in the six months following the bottom after the global downturn/SARS scare in early 2003. On the other hand, during the six months after the 2004 China hard-landing fears and the 2006 mid-cycle slowing scare, the regional index rose 27% and 25%, respectively. We forecast MXAPJ will rise 9% over the next 6 months to the 440 index level, which would equate to a 22% recovery from the May lows.

Eoin Treacy's view The MSCI Asia Pacific ex-Japan Index rallied spectacularly from March 2009 to January 2010 but has been ranging around 400 for most of this year. The Index posted failed upside and downside breaks in April and May respectively and is currently rallying from the lower side of the congestion area. A sustained move below 390 would be required to break the short-term progression of higher reaction lows and question scope for a continued advance towards the 440 area.

The Index is heavily weighted by the region's larger cap markets which have underperformed and it fails to reflect the outperformance of markets such as Indonesia, Thailand, Philippines, Malaysia, India and Korea. Some of these indices have become short-term overextended relative to their 200-day moving averages but would need to take out their medium-term progressions of higher reaction lows to question the consistency of their uptrends.