Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Strategy Overview: Asia Equity For several months the stock market has made major gains, adding up to what was probably the greatest bull market in recent history. Our recommendation to stay positive in the second quarter was straightforward as we had identified the catalysts for valuation, economic growth and liquidity to normalize. We stayed positive in the third quarter but were of the view that the stock market's turbo charge might have some lag as risk premium normalization had run its course and markets would need time to justify recent gains. Third quarter's performance was not as spectacular as the second quarter’s but MSCI Asia ex-Japan still managed to surge 15%, making both quarters two of the best performing quarters in history.(Fig. 1) Fig. 1: MSCI Asia ex-Japan quarterly performance % 50 40 30 20 10 0 -10 -20 -30 88 90 92 94 96 98 00 02 04 06 08 Q1 Q2 Q3 Q4 Average 3.1 3.2 -1.6 6.7 2009 3.8 29.0 14.4 High 24.8 30.4 16.5 48.2 Low -21.0 -28.5 -24.5 -22.1 Source: Datastream. Average calculations from 1988 Setbacks, that appeared threatening, have proved to be temporary and served merely as renewed buying opportunities in an upwardly rising trend. The sharp correction in the China 'A' share market and its impact on the Hong Kong bourse and other regional markets was a major setback this quarter and has been one of the major risks in the market, which we had highlighted last quarter. The end of US recession in June marks the end of the financial crisis in our view and we continue to stay on the positive side in the coming quarter. The fourth quarter has always been the best performing quarter of the year with an average performance of 6.7%. In an upwardly trending market amid positive news flow and momentum, we believe this should be the least that can be expected for this quarter. We recommend staying invested but re-jigging portfolio positions to exploit the opportunities and risks in the current quarter for better upside. What will put an end to the bull market? With the stock market already up so much in the last six months, the inevitable implication is that the stock-market boom must end. The focus now is one when the fiscal support, which was thought to be the main pillar for the economic recovery thus far, will be withdrawn. The bear side of the story is that once the impact of the stimulus dissipates, the recovery will not be sustainable. The stock market, which has been building on high hopes of an economic recovery, will face a major sell off soon. No early exit At this stage, we remain positive that there is little to worry about in the short term. It is highly unlikely that huge stimulus packages will be suddenly withdrawn because that would threaten the fragile economic recovery. Over the G20 meeting in early September, Alistair Darling, the Chancellor of the Exchequer, warned that the world could be dragged into a double-dip recession if governments stopped stimulating their economies. As Dominique Strauss-Kahn, managing director of the International Monetary Fund, mentioned in the same meeting, withdrawal of stimulus will need to be handled delicately, and not before households and companies are up to the task of "taking the baton" of supporting growth from the public sector. In an opening address at Summer Davos in Dalian, China's premier Wen Jianbao signalled that he will maintain unprecedented government spending to drive recovery and that "China's economic rebound is too unstable, unbalanced and not yet solid" and " ... we cannot and will not change the direction of our policies when the conditions are not appropriate". We are of the view that there is no early exit in sight and there are many justifications for that in Asia. No bubble Investors are worried about early signs of bubble markets in Asia, as the early restoration of confidence, fiscal support, and low interest rates have led to an asset boom. These are valid concerns, but it is probably too early for policy makers to act Page 7
Regional Equity Strategy 4Q 2009 Strategy Overview: Asia Equity on them. The fundamental checks are (1) whether asset price inflation will eventually start spilling over onto the CPI and (2) if there is cost push inflation, especially from the labor market, raw materials and business costs, which will in turn compress margins. China's CPI and PPI continued to fall in August, suggesting there is still no price pressure in China. Unemployment rate in Asia probably hasn't peaked yet. We look at the formation of bubble markets from three aspects: stock, property and credit markets. The conclusion is that there may be premature signs of a bubble but not suggestive of an imminent burst. Stock market bubble A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some measures of stock valuation. Valuations We should be worried about market valuations getting excessive: Asia's price to book value is nearing one standard deviation above the long-term average. Its relationship with 12-month forward return does not suggest an imminent bursting of the bubble but Asia index would likely go nowhere in the next 12 months. Ideally, we would not like to see an overshooting of Asia's P/B above one standard deviation. However, in view of the still abundant liquidity, this may be just wishful thinking. It is possible to see an upward revision of book value, mainly from property asset revaluation and banks' provisions being ploughed back, which will render book value less expensive. (Fig. 2) Fig. 2: Asia ex-Japan P/B vs 12m forward return 2.9 2.6 2.3 2.0 1.7 1.4 1.1 (x) (%) -60 0.8 93 95 97 99 01 03 05 07 09 12-m fwd return (R, inv erse scale) AXJ P/B (L) Source: Datastream, DBS. Bands are plus/minus one standard deviation bands. Fig. 3: Asia markets: P/B and one standard deviation targeted levels Avg Std Current # of SD One SD PB Target upside Current Index Potential support level SET 1.8 0.3 1.9 0.1 2.2 16% 703 814 STI 1.3 0.2 1.3 0.2 1.5 13% 2,638 2,992 China A 2.9 1.1 3.5 0.6 4.0 13% 3,184 3,593 HSI 1.7 0.4 1.9 0.5 2.1 10% 20,866 23,010 TWI 1.9 0.3 2.0 0.4 2.1 8% 7,346 7,943 H-sh 1.8 0.8 2.6 1.0 2.6 0% 12,156 12,122 AXJ 1.7 0.3 2.0 1.0 2.0 -1% 536 533 KLCI 1.6 0.2 1.9 1.0 1.8 -1% 1,207 1,200 KOSPI 1.2 0.3 1.6 1.3 1.5 -4% 1,653 1,579 India 2.5 0.8 3.5 1.3 3.3 -7% 16,454 15,373 JCI 2.3 0.7 3.6 1.7 3.1 -14% 2,420 2,072 -45 -30 -15 0 15 30 45 Source: Datastream, DBS Based on P/B at one standard deviation above average, there is still upside for Hang Seng Index, A-share, SET, TWI and STI of around 8-15% before these indices are considered excessively overvalued. Page 8
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Left Brain Right B - the DBS Vickers Securities Equities Research

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