Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
Against this backdrop, we do not think there is an Asian stock
market bubble but investors should be wary of excessive
valuations. We recommend markets and sectors, which (1)
trade at cheaper price to book value compared to their
historical trends, and (2) have room for earnings upside in the
next 12 months. Any small positive news will have a long
lasting impact on the returns of these stocks.
Fig. 6: Asia sectors: Price to book value below long-term
average
Current
P/B
Average
P/B
Std Dev
P/B
# of SD away
from avg
Hong Kong Banks 1.7 2.3 0.5 -1.2
Taiwan Financials 1.2 2.5 1.7 -0.8
Taiwan Tech 2.1 2.9 1.2 -0.7
Malaysia Utilities 1.4 1.8 0.5 -0.7
Malaysia Telecom 2.0 2.5 0.9 -0.6
Singapore Telecom 2.7 4.8 3.3 -0.6
Thai Banks 1.4 1.7 0.6 -0.5
Singapore Banks 1.4 1.5 0.3 -0.4
Hong Kong Telecoms 2.5 4.0 3.7 -0.4
Malaysia Travel & Leisure 1.8 2.2 0.9 -0.4
Thai Telecoms 4.3 7.3 8.4 -0.4
India Tech 6.7 10.3 10.9 -0.3
Malaysia Oil & Gas 2.2 2.5 0.9 -0.3
Hong Kong Ind Gds & Svs 1.1 1.2 0.3 -0.2
Taiwan Inds Gd & Svs 2.7 2.8 0.7 -0.2
Malaysia Banks 1.9 2.1 0.7 -0.2
Singapore Ind Gds & Svs 0.9 1.0 0.3 -0.2
Hong Kong Utilities 2.4 2.5 0.6 -0.2
Taiwan Chemicals 1.9 1.9 0.5 -0.1
Indonesia Banks 3.3 3.7 3.4 -0.1
Hong Kong Oil & Gas 2.7 3.0 3.4 -0.1
Thailand Oil & Gas 2.1 2.2 0.9 -0.1
Taiwan Telecom 1.8 1.8 0.4 0.0
Source: Datastream, DBS. Highlighted rows are cyclical sectors with
earnings upgrade potential
Fig. 7: Asia sectors: Price to book value more than one
standard deviation
Current
P/B
Average
P/B
Std Dev
P/B
# of SD away
from avg
Korea Pers & H/H Gds 2.9 1.9 0.4 2.2
India Basic Resource 4.5 2.0 1.3 2.0
India Inds Gds & Svs 6.7 3.2 1.8 1.9
India Utilities 3.0 1.6 0.8 1.8
Korea Basic Resource 1.4 0.9 0.3 1.8
Taiwan Oil & Gas 4.0 3.0 0.6 1.8
Indonesia Utilities 11.4 6.4 3.0 1.7
Indonesia Basic Resource 2.8 1.2 0.9 1.7
Indonesia Pers & H/H Gds 6.0 4.3 1.2 1.4
India Oil & Gas 2.9 1.9 0.8 1.3
Korea Auto & Parts 1.4 0.9 0.4 1.3
Indonesia Auto & Parts 3.7 1.8 1.4 1.3
Hong Kong Technology 7.8 4.7 2.5 1.3
India Banks 1.8 1.2 0.5 1.2
China Basic Resource 2.8 1.5 1.1 1.2
Korea Inds Gds & Svs 1.8 1.2 0.6 1.1
China Insurance 4.7 3.3 1.4 1.1
Hong Kong Real Estate 1.3 1.0 0.3 1.0
Source: Datastream, DBS. Highlighted rows are defensive sectors
Is there a housing bubble?
Bubbles are hard to spot and economists can't agree on what
counts as a bubble. After the US housing debacle believed to
have been brought about by easy US monetary policy between
2003-2007, recent house price rises in Asia have investors
worried of another imminent housing bubble.
We believe that not all price rallies are unjustified. Pent-up
demand after the initial sharp contraction in anticipation of a
deep recession was the key driver of property prices in the
recent few months. Low interest rates, economic recovery and
inflationary concerns will continue to drive expectations of
higher property prices and thus demand. Our "bubble" check
focuses on affordability and assessment of policy tightening.
At this point our conclusion for most Asian markets is that
affordability levels remain healthy and falling inflation and still
weak demand growth means policy tightening will come only
next year. However, there are early signs of speculative
activities in some markets which may call for a fine-tuning of
government regulations on the property sector. We believe
that policy makers will be quick to respond to abnormal price
behaviour this time round to prevent the likes of the US
housing bubble.
For markets in Hong Kong, Singapore and China, there are
"physical signs" of a red hot property market, such as long
queues and units being snapped at new launches, significant
increase in take-up rate and "verbal" intervention by
governments to cool down the euphoria. Our analysts have
argued that housing affordability ratios (measured as a
proportion of mortgages to monthly household income) are
still lower than previous crisis levels. In Singapore, the
government has announced control measures to pre-empt
excessive property speculation.
Hong Kong: Housing remains much more affordable than at
any time between 1994-2000, primarily due to cheap
mortgages. As a result of keen competition among banks,
effective mortgage rates have fallen to 2.5% or lower, near the
lowest for almost 15 years. Tight future supply should also
support home prices.
Page 10