Research Report-r1:AMM grid in qxp 12/24/09 9:51 AM Page 74
RESEARCHREPORT
SEANDARBY NIALLMACLEOD
Followinga
ASIA EQUITY STRATEGIST, ASIA EQUITY STRATEGIST,
NOMURA UBS INVESTMENT RESEARCH
volatile2009,
We expect 2010 to be a year With earnings expecta- Put simply, Asian equity valu-
of re-balancing for both the tions low, the uplift in earn- ations are no longer com-
which
global economy and financial ings revisions is the steepest pelling. Regional equities are
markets. Asia has excellent on record. not overvalued, but nor are
banking systems, underval- This is having two unin- they at bargain basement lev-
countriesand
ued currencies and large cur- tended consequences. First, els. Liquidity conditions
rent account surpluses while it has caused equities to remain loose, although some
the developed economy is sharply outperform bonds; central banks could either
sectorsoffer
the complete opposite. second, it is passing through tighten or, at least consider
The G7 countries will cost-push inflation into the exit strategies from loose
need further time to heal global economy. policies.
themost
themselves while the impact Since the beginning of the The brightest spot is cycli-
of their own fiscal stimuli year, food prices have rallied cal conditions which contin-
fades. In turn, Asia will be more than 10%. These imbal- ue to look good and should
potentialand
expected to grow above trend ances have not disappeared support more earnings
either through higher con- as biofuels compete for land upside.
sumption or by moving alongside grains, and Overall, we expect anoth-
whichface
father up the value added increasing incomes in emerg- er year of positive returns,
curve by offering higher serv- ing-market economies but given fairer valuations
ices. demand much more protein. and tighter monetary condi-
thelargest
Equally, the region’s With the global recession tions returns will be driven
nations will need to lift their over, we believe there is like- more by earnings growth.
exchange rates to increase ly to be increasing pressure Our year-end target of 600 on
challengesin
the purchasing power of resi- on food prices to rise. the MSCI Asia ex Japan index
dents to acquire overseas Corn and rice prices are would leave the markets at 15
assets, thereby recycling the just starting to increase. times forward earnings, in
large domestic surpluses into Since corn is used to feed cat- line with their long-term
2010?
deficit economies. tle and poultry, it directly average and broadly in line
With Asia and emerging impacts the price of meat. with earnings forecasts for
markets leading the global Rice is a major component of 2010.
economy out of the 2008 Asian CPI. We continue to Investors may also have to
slump, these economies will like the soft commodity sec- contend with changing mon-
still need to maintain a rela- tor. etary conditions early in
tively relaxed monetary poli- Meanwhile the deprecia- 2010, and a tightening of
cy to ensure that growth is tion of the US dollar along- monetary policy would be a
self-sustaining. With little side financial gearing is probable catalyst for any cor-
room in some cases to beginning to manifest itself rection.
expand fiscal deficits, we in an inflation echo through There is also a risk that a
would expect central banks Asia as well as rising move- combination of loose mone-
to buy some growth insur- ments in asset prices. tary policy, strong capital
ance by keeping interest rates For investors, there must inflows, and accelerating
low. be a balance in risk taking as growth could cause surge val-
Producer prices in many well as marginalising corre- uations to surge in 2010. This
industries are rising at their lations to external variables is not our core view but we do
fastest rate in annualised such as a weak US dollar. To expect to see a valuation
terms during the past 25 date, a bar bell strategy extreme at some point in this
years in Asia. As a result the seems appropriate. monetary cycle.
risk of an “inflation echo” is Regional telecoms are We remain bullish on the
growing. laggards with strong cash- Asian liquidity thesis – loose
The need to raise produc- flow and have underper- monetary policy driving up
tion in Asia has significantly formed. Internet stocks Asian asset prices – and
lifted prices year-on-year — exhibit high cash-flow, are expect this to remain intact
from shipping rates to fast-growing and are a proxy for some time.
DRAMs to milk — creating a on consumption. Finally,
supernormal period for prof- Taiwan technology appears
its. fairly priced.
74 DEC2009/JAN2010 ASIAMONEY
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