Treading water
That was the easy part: Asian equities have now priced in a
decent recovery over the next year
But, with valuations a little stretched, market progress is
likely to stutter over the next few quarters
We recommend lowering cyclical risk, focusing on structural
growth and sticking to blue-chip stocks
Asian equities rose 65% from March to June, as the global economy bottomed and risk
aversion fell. But the easy part is now over. The “green shoots” rally has already petered
out, with Asian stock markets actually falling slightly in June.
Our view is that the next six to nine months will be rather stop-start. Global growth will
continue to recover gradually, but that is priced in: for Asia, analysts already expect 30%
earnings growth in 2010 and economists look for decent GDP growth, for example 8.4%
in China and 7.0% in India. The market has anticipated leading indicators such as the US
manufacturing ISM getting back to 55 by the end of the year. Valuations in Asia have
already got back to the level it took them three years to reach in the 2003-7 bull market.
Moreover, the end of the first leg of a rebound is always tricky for equities. The initial
bounce is usually triggered by fiscal and monetary stimulus. When growth picks up,
markets start to worry about when this will be withdrawn. In 1994 and 2004 in the US, for
example, markets moved sideways for a year after the first rate rise. This time, we think
central banks will err on the side of caution in raising rates but that will not stop markets
worrying about it. Overall, we see Asian equities edging a little higher over the next six to
nine months, as long as growth comes in as forecast, but not without some scary moments.
In this environment, we advise investors to remain positive about equities, but also to take
some risk off the table, particularly cyclical risk. Among cyclical markets, we lower Japan
to underweight, and remain underweight on Korea and neutral on Taiwan. Our
overweights are the two developed markets in Asia ex Japan, Hong Kong and Singapore;
China, which will be helped by liquidity and its ability to do further fiscal stimulus; and
Malaysia, for its defensiveness and liberalisation policies.
We also nudge back the cyclicality of our sector recommendations, raising telecoms to
neutral and ending our overweight on energy. We like long-term structural growth sectors
such as consumer discretionary (e.g., Chinese department stores) and selected industrials
(particularly Hong Kong conglomerates). Our key recommendation remains to buy quality
blue-chip stocks. We refresh our Asia Super 10 with suggestions of which ones.
Contents
Investment strategy 4
Stop-start 4
Market recommendations 16
Fully exposed, but lower risk 16
Sector recommendations/
investment themes 21
Easing up on the beta 21
Stock picks 23
Main markets 27
Japan (underweight) 28
China (overweight) & Hong Kong (overweight) 30
Korea (underweight) 34
Taiwan (neutral) 36
India (neutral) 38
Other markets 41
Australia 42
Singapore 43
Malaysia 44
Indonesia 45
Thailand 46
Philippines 47
Datapack 48
Country/ Sector performance 48
Earnings 50
Valuation 51
Supply & demand 52
Politics and risk 53
Sectors and stocks 54
Economic forecasts 58
Top stock picks 59
Acer, 2353, UW(V) 60
Angang, 347, UW(V) 61
AU Optronics, 2409, OW(V) 62
Bank of Communications, 3328, OW(V) 63
Chalco, 2600, UW(V) 64
China COSCO, 1919, UW(V) 65
China Life, 2628/601628, UW(V) 66
China Southern Airlines, 1055, UW(V) 67
China Steel Corp, 2002, UW(V) 68
Dongfang, 1072, OW(V) 69
GMR Infrastructure, GMRI, UW(V) 70
Hindustan Unilever, HUVR, OW 71
HTC Corp, 2498, UW(V) 72
Jardine Matheson, JM, OW(V) 73
KT Corp, 030200, OW 74
Samsung Electronics, 005930, OW(V) 75
Samsung F&M, 000810, OW(V) 76
Tencent, 700, OW(V) 77
Woori FHC, 053000, UW(V) 78
ZTE, 763, OW(V) 79
Disclosure appendix 80
Disclaimer 83
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