Research Report-r1:AMM grid in qxp 12/24/09 9:51 AM Page 75
JONATHANGARNER SAKTHISIVA
CHIEF ASIAN AND EMERGING ASIA EQUITY STRATEGIST,
MARKET EQUITY STRATEGIST, CREDIT SUISSE
MORGAN STANLEY
After two years where macro weight, given both current History is not always an accu- the fifth and sixth most
themes drove Asian equities, valuations and its historical rate guide to future perform- undervalued markets cur-
we expect a shift to a more sensitivity to a global rate ance, but to the trend from rently.
micro market in 2010. hike cycle the seven global recessions We continue to over-
Firstly, given that We recently concluded that occurred since 1950 is weight cyclicals over defen-
economies and earnings are our two-part series on the best year for equities is sives, as we believe consen-
recovering and it is probably Sources of Competitive the first year of recovery sus earnings revisions will
too soon in the cycle for a Advantages in EM by naming coming out of recession due be strongest in the former
major peak in Asia Pac ex the Best Business Models in to depressed valuations, and weakest in the latter as
Japan equities. However, we each of 26 different industry earnings upgrades and no the recovery broadens.
do face the headwinds of groups. In our view these are policy tightening. The aver- Among cyclicals, our
monetary policy tightening, firms with the ability to gen- age gain in the first year of favoured cyclical is energy,
first in Asia and then the US, erate superior equity returns recovery is 42%. as it trades on the biggest
plus a higher oil price. over the cycle. In the second year the discount of 34%.
Valuations look neither Key Asian names that average gain was 19% on
expensive nor cheap. On our make the list: China average, largely because the
base case for 2010 is of US Dongxiang, CNOOC, central banks often started to
dollar earnings per share
Ctrip.com, Hyundai Mobis, tighten up their policies. We
growth of 21%. The MSCI A- Hindustan Lever, Largan expect Asia to lead in the next
Pacific ex-Japan index is Precision, Larsen & Toubro, tightening process and pre-
trading on 15 times 2010 Media Tek, Mindray, Reliance dict Korea, China and India to
estimated earnings price to Industries, Sun Pharma, Tata start tightening over the next
equity ratio, which is close to Consultancy, PT three to six months.
the long-run average. Our Telekomunikasi, and Credit Suisse believes
year-end 2010 price target is Tencent. Korea will raise base rates by
486, implying 18% upside 25 basis points in December,
“The need to raise
from current levels. while China should raise the
production in Asia has
If you look back to 1994 reserve ratio requirement
and 2004, Asian equities over the next three months
significantly lifted prices
have tended to experience a and increase interest rates in year-on-year — from
local peak in performance the third quarter of 2010.
shipping rates to DRAMs
somewhat ahead of the first India could see a hike in the
Federal Reserve rate hike. reverse repo rate in March or
to milk — creating a
In terms of country pref- April.
supernormal period for
erences, China is our biggest Currently investment risks
overweight. We are also over- are low as the recoveries are
profits.”
weight India, though in gen- becoming broad-based. In
eral we see fewer mispricings China, for example, the SEAN DARBY, ASIA EQUITY STRATEGIST, NOMURA
to exploit at the country level recovery has broadened from
than a year ago. government infrastructure
We have recently down- spending to consumption and
graded Taiwan to equal exports. Even in Korea, recov-
weight. However, we believe ery has broadened into con-
investors can profitably take sumption.
risk at the sector level. Our We believe the most accu-
preferred sectors are rate valuation model is price-
upstream energy in general, to-book versus return on
and financials and consumer equity. Based on that model,
discretionary in the under- the four most undervalued
levered, faster-growing countries currently are
economies of China, India Thailand, Indonesia, the
and Indonesia. Philippines and Korea. Given
We are less constructive that Thailand and the
on the telecoms sector while Philippines are rather small
we have recently downgrad- and illiquid, we highlight that
ed the IT sector to equal China H-shares and India are
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