Our view
Global lead indicators continue to improve, while the US ISM breaking through 50
points to further expansion of the manufacturing base. Upward revisions to Asian
earnings are gathering momentum, and with new orders in the US still outpacing
inventory, restocking still has some inertia.
Anchor themes
Despite improving economic fundamentals, global manufacturers outside of Asia
ex-Japan are still drawing down inventory. Korea’s record low inventory/shipment
ratios suggest that manufacturers are hard-pressed to meet short-run demand.
Over the past two quarters, earnings revision investment styles have
underperformed risk styles, such as return volatility. We expect this to change as
investors are forced to trade-off higher market valuations against companies
scoring well on forecast earnings improvement.
Earnings revision turning point (IV)
and market rotation (II)
􀁣 A sense of seconds
As the global economy responds to monetary and fiscal stimulus, new
orders will likely force companies to normalise inventories. Companies are
still running down inventory to meet demand, displaying a lack of confidence
about the future. At some point, the animal spirit of optimism should spring
forth and companies will realise their production schedules are too low and
will look to rebuild depleted products. Asia ex-Japan appears to be in the
best position to respond. Marginal improvement in external demand will
cause investors to re-assess the inexpensive valuations of export-dominated
economies, against the credit-growing, domestically-focused economies.
􀁤 Technology leads the herd
In our quantitative research, Earnings Revision Insight, Herding the way
technology leads, 3 September, 2009, Sandy Lee highlights our Asia
forward-looking earnings momentum indicator shows a sharp improvement
for a fourth consecutive month. In August, positive earnings revisions were
seen across the board again in all eight markets, with Australia, Thailand
and Singapore catching up of late and showing stronger upturns (m-m).
Earnings expectations for Thailand, India and Taiwan now fare the best in a
regional context. Notably, Taiwan and Thailand also lead, based on
StarMine predicted surprise scores. In Exhibit 37, we highlight stocks in our
multi-factor model that stand to benefit the most from earnings upgrades.
􀁥 How investors can implement our view
Since 22 July, 2009, we have advocated a shift from domestically-focused to
export-orientated economies, such as Korea and Taiwan. This is in line with
our view that markets may tread water in the short term. We are closing LG
Display-UMC, China Steel-POSCO and Hon Hai-SEMCO switch trades due
to rating changes.