Independent economics group Lombard Street Research has downgraded its outlook for Asian and Japanese equities from positive to neutral.

"The dramatic collapse of exports in the region towards the end of last year has dimmed our enthusiasm and their economies lack domestic drivers to stimulate recovery," notes Charles Dumas, chief economist in a new report.

China's exports were down 15% in November from October and have fallen further since. Japan's exports fell 16% by volume in November and another 11% in December. Korea's have fallen even faster. The share of GDP represented by these two-month falls is 6% for China and 4% for Japan.

Dumas argues that savings-glut countries such as China and Japan (as well as Germany) have such high savings not out of strength, but because of a deficiency of domestic demand. It has only been exports or government spending that keep these economies on track, and business capital spending is sensitive to export industry performance.

"It is particularly hard, therefore, for domestic spending to shift into a higher gear if and when a major decline in exports is sapping domestic incomes and the 'animal spirits' of businessmen that drive cap-ex," notes Dumas. "...The savings glut, having induced a debt glut in deficit countries that has now stopped the whole world economy in its tracks, is now 'consuming its own'."

Lombard analyst Michael Taylor, who covers Japan, notes that the valuation case for Japanese equities remains strong. Companies are not leveraged. The price-to-cashflow ratio has fallen to 4.2x, below the 4.9x reached during the recessionary low earlier this decade. The average dividend yield is 2.9%, well above the 10-year JGB yield.

"But while valuations look increasingly attractive, the collapse in exports towards the end of last year was shocking and the equity market response was not surprising. Sentiment towards the market is very negative," Taylor says. Any attempts at government action are drowned by subsequent bad news. The four weeks to January 23 saw foreigners sell a net ¥792 billion of Japanese equities.

It's a similar story in other Asian markets, including Korea, Hong Kong, India and Australia: valuations are incredibly cheap, but the deteriorating export outlook means Lombard is downgrading them from positive to neutral; India also has question marks over its inability to quell inflation, while the retreat in commodity prices and high levels of private-sector debt has undermined investment opportunities in Australian equities, according to Lombard analyst Maya Bhandari.