Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Strategy Overview: Asia Equity Fig. 14: US mutual funds cumulative (YTD) net new sales by fund category US$bil 8 6 4 2 Our US economist pointed out that with the slowdown in US jobless claims we will be able to see job loss turning into job gains in a few months time. 4. The impact of cash calls for US banks remain uncertain as banks' balance sheets still need to be strengthened. But from the market's point of view share prices should remain steady before the cash raising exercise. 0 (2) (4) (6) Jan Feb Mar Apr May Jun Jul Emerging Markets International Global Source: Datasream, DBS 3. Third quarter's earnings results for the US still remain uncertain when measured against upgraded expectations. However, with the US leading indicator turning decidedly upwards, we remain hopeful that we continue to see US earnings being upgraded. (Fig. 15) 5. Remember that the Fed would probably end its Treasury purchase programme in October and the mortgage bond re-purchase programme in December. The impact on the bond market is most likely to be negative where bond yields are expected to rise. Our fixed income strategist is of the view that US 10-year interest rates should remain in the range between 3-4% unless we see substantially higher US GDP growth and core inflation. 6. Should US GDP growth rise higher than potential (3% range) in the coming quarter, the bond market should react with a spike up in yields. (Fig. 16) Accordingly we forecast that Fed funds hike can come as early as 2Q10. Even so, the negative impact of a rate hike cycle is inclusive on the stock markets based on the past four cycles. (Fig. 17) Fig. 15: S&P 12m fwd EPS forecast vs US Leading indicator Fig. 16: US Bond yield vs real GDP growth 8 6 110 110 100 7 4 90 100 2 80 6 90 0 70 5 -2 60 80 50 4 -4 40 70 -6 30 3 60 -8 20 2 -10 10 50 92 94 96 98 00 02 04 06 08 85 87 89 91 93 95 97 99 01 03 05 07 09 US 10-year bond yield (LHS) S & P 500 Index - 12Mth Fwd Wtd EPS (LHS) US GDP growth minus 3% potential growth (RHS) US Leading Economic Indicators Index (RHS) Source: Datasream, DBS Source: Datasream, IBES, DBS Fig. 17: Stock market performance in past four FED rate hike cycles Market performance US Interest rate hikes S&P 500 MSCI Asia From To Change (bps) From To % From To % 2/4/94 2/1/95 3 6 300 481 470 -2% 409 308 -25% 3/25/97 3/25/97 5.25 5.5 25 791 789 0% 378 380 1% 6/30/99 5/16/00 4.75 6.5 175 1351 1466 8% 360 345 -4% 6/30/04 6/29/06 1 5.25 425 1136 1273 12% 297 413 39% Source: Datasream, DBS Page 13
Regional Equity Strategy 4Q 2009 Strategy Overview: Asia Equity 7. Timing is the soul of investing in China and some investors hype it with China's 60th party anniversary celebration. Our belief is that China will continue with its reform policy and Premier Wen Jiabao made it very clear during the Davos speech that the fiscal stimulus is not about US$4t spending but a stimulus programme to encourage domestic investment and spending that would benefit China in the long term. Not forgetting that China's exports demand should also start to shift to recovery mode which would accelerate China's growths in the next few quarters. 8. There are signs that the USD may start to weaken as the recovery matures into the growth stage from the "worst is over" stage. This should allow for Asian currency appreciation. At this juncture, our currency strategist expects Asian central banks to slow the appreciation pace of their currencies and maintain a modest USD depreciation profile. A weak USD should favor commodities and Asian asset markets 9. With the abundant liquidity around, we believe investors will be chasing for higher yields. Against this backdrop, carry trades and high risk appetite should favor Asian assets. 10. We are uncomfortable with the recent sharp rise in the gold price:- It may be signaling an increase in risk aversion or a rising fear of inflation, or the collapse of the USD. All of which will add volatility and will not be positive for Asian stock markets. Asset allocation strategy The coincident relationship between economic and stock market cycles suggests that upward momentum will continue as long as the economy remains on track. The powerful impact of the synchronised global upturn could be under-estimated the same way the synchronised global downturn came along. We believe markets have the propensity to touch the pre-crisis high levels. A clearing level would be for Asia earnings to return to pre-crisis levels by 2010 as we have forecast for GDP levels to return to pre-crisis levels by end 2010. We arrive at 2010 year end targets using this assumption. We acknowledge that Asia's valuations are getting stretched and investors may be concerned about the withdrawal of stimulus packages and formation of asset bubbles in Asia. Given the strong rally in the last six months, these worries may serve as reasons for profit taking. Support levels using P/B at one standard deviation calculations show correction may not be severe. We recommend staying invested but re-jig the portfolio to exploit the risks and opportunities in the coming quarter. We are making the following changes to our market strategy:- a. Reduce our overweight in Hong Kong and China 'H' to Neutral to mitigate China's macro policy risk b. Reduce Singapore overweight to a slight overweight. Early signs of housing bubble and government's intervention may dampen positive sentiments in the Singapore market in the short term. Like Hong Kong and China 'H', these high beta markets have returned in excess of 80% from the low on 9th March and will be more prone to profit taking. Our slightly overweight position is maintained on Singapore over Hong Kong due to its cheaper valuations and strong re-rating drivers in the coming quarter - a correction, if any, will see Singapore holding better than Hong Kong c. We raise Taiwan and Korea to Overweight in view of the synchronised global upturn. Taiwan and Korea stock indices are heavily weighted towards Industrials and Technology which will benefit from the upturn. A stronger won forecast now also justifies the Korea upgrade. Our preference in Taiwan over Korea is maintained due to higher policy risk in Korea and Taiwan's cheaper valuations (based on historical standards). Taiwan's cyclical sectors like Chemicals, Industrials, Telcos, Banks and Technology were captured in the attractive P/B sector screen. Re-rating potential in Taiwan is higher due to improving crossstraits relationships while the North Korea threat will always linger. d. We raise Thailand to Overweight on the back of attractive valuations. Big sector weights like Banks and Oil & Gas sectors are still good value plays e. We continue to believe in the longer term higher potential growth of Indonesia and that the market can re-rate further despite an already consensus overweight position and higher valuations. The lower interest rate and inflation scenarios may set another growth regime for Indonesia on the back of a constructive political environment. World Bank recently upgraded Indonesia's GDP growth forecast to 6.5% next year, which will be near its potential level. Indonesia's valuations, though high, are still comparable with China's and India's - the other two high growth economies in Asia. This quarter , however, we reduce it from Overweight to Neutral on a tactical move to exploit better opportunities elsewhere. Page 14
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Left Brain Right B - the DBS Vickers Securities Equities Research

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