Left Brain Right B - the DBS Vickers Securities Equities Research

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.
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