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Asian Equity Strategy Economics – Markets – Strategy Fig. 10: Key drivers Countries Positive drivers Negative drivers Singapore Valuations are attractive in a historical context. Downgrades High beta, financial services and direct investment growth already in the price, domestic growth still intact. Less affeced will be affected by global growth slowdown by inflation; government has ability to pump prime; ongoing projects should continue to drive investment growth. Interest rates should rise slower than other countries; demand for offshore marine servivces remain strong; Hong Kong Malaysia Broad based economic expansion; rising rates in syn with inflation cycle Overhang on fuel price subsidy removed; politcal uncertainty provides opportunity for change; CPO prices stable Most affected by rise in US interest rates as well as austerity measures in China Political uncertainty to delay investment spending with the withdrawal of fiscal stimulus previously budgetted Thailand Weak THB to help exports sector which has been a big contributor to growth Higher inflation, interest rates and politic uncertainty to bite into domestic demand recovery; no end in sight for Indonesia Coal and energy sector still attracting FDI and in demand Removal of subsidy to affect spending and fear that more cuts might be needed; inflation to rise above double digit and interest rates to rise; fear of weakening rupiah China Korea Good growth; strong domestic consumption and demand, urbanisation and reconstruction needs to sustain high level gowth Fiscal stimulus on the way; weak won and interest rate cuts to help exports sector; exports sector geared to US recovery Further tightening in fear of overheating; inflation overshoot Still weak domestic demand and confidence due to financial strains of falling property prices Taiwan Improving cross-straits relationship; Tech sector to improve from US recovery; attractive valuations India Growth is still forecast to be close to 9% Monetary tightening to cool overrun inflation; twin deficits means fiscal constraints and weak currency; risks of policy mis-step compromised by politics Emerging ASEAN Infrastructure needs to sustain investment spending Overrun inflation, weak currency due to USD rebound, rising interest rates to tame inflation, political uncertainty adds to domestic woes; fear of weakening currency augmenting outflows spiralling to further weakness. Budget constraint on fiscal spending. High oil prices to affect sentiments and spending; domestic demand story is questionable now North Asia Relatively exports dependent which means better prospects in a US recovery scenario; inflation rate still below 5% which are comparatively lower. No urgency to raise rates Relatively exports dependent Source: DBS 60
Economics – Markets – Strategy Asian Equity Strategy Risk appetite If the retracement from the high of 4Q 2007 is due mainly to a loss of risk appetite or a rise in equity risk premium because of a deterioration in the external environment, a gradual return to normalcy would bring markets back to pre-crisis levels. Our risk appetite assessment model (introduced in 4Q07) suggests that risk appetite has fallen the most since September 2007 in Singapore, Hong Kong and China. But it has indeed improved in Taiwan. The implications are that all things being equal, we will see that an improvement in risk appetite should benefit countries that were most heavily penalized. Deteriorating domestic conditions in Thailand and a rising interest rate environment for Hong Kong suggests that a return to pre-crisis levels for these countries is unlikely. Hence, we are downgrading these two markets. We are upgrading Singapore because domestic conditions are intact. The current risk profile and key drivers for each of the markets are summarised in Fig. 12 and 10. Fig. 11: Change in implied equity risk premium Current end 3Q07 Difference ERPs (%): Singapore 12.0 5.0 7.0 Hong Kong 6.2 0.4 5.8 China 7.3 1.8 5.5 Malaysia 12.7 9.9 2.8 India 3.6 1.1 2.5 Asia ex-Japan 6.2 3.9 2.3 Indonesia 3.4 1.4 2.0 Thailand 6.5 5.0 1.5 Korea 3.6 2.7 0.9 Taiwan 6.3 8.9 -2.6 Source: DBS calculations Statistical analysis: Impact of higher oil price, bond yields and stronger USD on markets and stocks The impact falls disproportionately on different sectors in the stocks market. As a statistical test, we calculate the correlation of weekly changes in Asia market indices and sectors with changes in oil prices, bond yields and USD index, using data from 1990 till present. The correlation coefficient is probably too low to be significant, but could be used as a relative comparison. The findings are summarized below: Impact on Markets Fig. 13: Asia indices’ sensitivity to oil price, bond yields and US$ strength Top 3 markets Positively correlated Oil Bond yields US$ strength Top 3 markets Negatively correlated Oil Bond yields US$ strength H-sh STI STI TWI SET H-sh KLCI KOSPI TWI STI KLCI HSI Sensex H-sh SET KOSPI TWI KLCI 0.06 0.3 -0.01 -0.05 0.08 -0.11 0.04 0.13 -0.02 -0.01 0.11 -0.1 0.03 0.12 -0.05 0.00 0.11 -0.07 Source: Datastream, DBS calculations Not surprisingly, the H-share index, which has a larger composition of commodity and oil stocks, is positively correlated to oil prices. The perception of Malaysia as a net exporter of oil also kept the index relatively positive to oil prices, although it might have become only a marginal net exporter in recent years. The presence of plantation stocks probably explains the link as well. The relatively higher proportion of energy stocks in Sensex explains the presence of Sensex among the top 3. Fig . 12: Current risk profile and sensitivity Improving Decreasing ERPs (%): 1 2 3.4 3.6 4 6.2 7.3 10 12 12.7 Singapore 7,487 6,866 6,095 5,993 5,796 4,838 4,431 3,592 3,093 2,938 Hong Kong 37,533 34,432 30,582 30,074 29,088 24,305 22,268 18,078 15,583 14,811 Malaysia 3,009 2,768 2,468 2,428 2,351 1,978 1,818 1,489 1,292 1,231 Thailand 1,248 1,149 1,025 1,008 977 822 756 619 537 512 Indonesia 2,902 2,680 2,402 2,366 2,294 1,944 1,793 1,480 1,291 1,232 China 22,961 21,040 18,655 18,341 17,730 14,766 13,503 10,907 9,362 8,884 Korea 2,257 2,070 1,838 1,807 1,748 1,459 1,335 1,081 930 883 Taiwan 13,118 12,072 10,771 10,600 10,266 8,646 7,954 6,527 5,674 5,409 India 18,813 17,270 15,346 15,092 14,599 12,194 11,166 9,044 7,773 7,379 Asia ex-Japan 928 852 756 744 719 601 551 447 385 365 Source: DBS, Datastream, Bloomberg. Note that the calculations uses a 10-year DDM, with 2008 and 2009 growth forecasts used (DBSV if covered, consensus otherwise) and long term nominal GDP growth forecasts for the 3rd - 10th year, terminal P/E of 12x, risk-free rate using 10-year or equivalent domestic bond yield, and average historical payout ratio. Shaded cells indicate current index levels and the inferred equity risk premium accordingly, 61
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