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Bản báo cáo của HSBC quý 2 năm 2008 (tiếng Anh)

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  1. Macro Equity Strategy Q2 2008 What kind of bear? Asia’s bear market is likely to be mild, not vicious The investment world has changed. We believe that Asia is now in a bear market. From last October’s peak, the index has fallen 29%. Risk aversion is likely to continue and US growth will slow over the coming months. It may not be a particularly nasty bear, though. We see a “W-shaped” slowdown in the US, not a recession. Asian economic growth will decouple to a degree. There could even be a bounce in the second half as US policy initiatives kick in. But investment style in a bear market needs to be very different to what worked in 2003-7 Investors can either aggressively trade the dips and rallies, or stick to quality, . long-term growth, which may become available cheaply. We recommend China, which represents good value again, Thailand and Korea for political change, and Malaysia which is classically defensive and where political worries are overdone. For sectors, we stick to structural growth stories such as consumer-related names, telecoms, infrastructure (for example, steel) and healthcare. Avoid Taiwan, Japan, technology, financials and energy. By Garry Evans Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
  2. Equity Strategy Asia Pacific abc Second Quarter 2008 Country weights and key reasons for our view Neutral HSBC Last Rel perf Key pluses Key minuses recommended Quarter last weight 3 mths Japan 49.0% 44.0% UNDER UNDER 6.3% Valuation the cheapest in history Economy already in recession Earnings growth likely to turn negative Politics in a stalemate Australia 12.3% 11.0% UNDER NEUTRAL -0.4% Domestic institutional buying should be a support Central bank still in tightening mode May not prove as defensive as in the past China 8.3% 10.0% OVER OVER -17.2% Valuations reasonable again, with PE down to 13x Investor sentiment badly dented Economy likely to continue to grow robustly this year Long-term growth story intact Korea 8.0% 9.5% OVER OVER -10.2% Lee Myung-bak’s policy programme a big positive Facing strong cyclical headwinds Cheapest market in Asia, on PE of 10x Taiwan 6.6% 5.5% UNDER UNDER 16.1% New president will improve relations with Beijing… …but perhaps not as fast as market expects The most cyclical market in Asia The two key sectors, banks and IT, both unattractive HK 5.0% 5.0% NEUTRAL NEUTRAL -10.0% Negative real interest rates GDP and earnings growth set to slow this year Prospects for property market are mixed India 4.1% 4.5% NEUTRAL OVER -18.4% Low sensitivity to exports and US economy Downside risk to consensus earnings forecast Long-term structural growth story still exciting GDP growth to slow to 7% in FY2008-9 Election in H2 will make market nervous Singapore 2.3% 4.0% OVER OVER 1.8% Liquidity conditions to remain loose Exports are very high percentage of GDP Cheap, with PE down to 12x Defensive, with range of blue-chip growth companies Malaysia 1.5% 2.5% OVER UNDER 1.5% Political worries after March’s election are overstated Political concerns may linger if PM resigns Valuations now reasonable Economy – but not listed stocks – rather cyclical Thailand 1.0% 2.5% OVER OVER 19.8% New government to boost infrastructure spending Political instability not over Cheap: PE 11x Indonesia 1.0% 0.5% UNDER UNDER 3.1% Economic growth to be robust ahead of 2009 election Structural worries: inflation and budget deficit Not cheap for such as volatile market NZ 0.3% 0.0% UNDER UNDER 3.0% Few interesting investible stocks Philippines 0.3% 0.0% UNDER UNDER -9.4% Too risky for the current environment Pakistan 0.1% 0.0% UNDER UNDER 29.2% Political situation still unstable Vietnam 0.0% 1.0% OFF-BMK OFF-BMK -20.8% Offers long-term value for an exciting story Government has grossly mishandled macro policy Source: HSBC, Note: In this and other tables, markets or sectors are ranked by their neutral weight in the MSCI Asia-Pacific index. Sector weights and key reasons for our view Neutral HSBC Last Rel perf Key pluses Key minuses recommended Quarter * last weight 3 mnths Financials 24.5% 22.0% UNDER NEUTRAL -6.7% Long-term asset-gatherer story still intact NPLs likely to rise as economies slow Falling interest rates will hurt net margins Industrials 15.8% 13.5% UNDER UNDER 2.0% Infrastructure-related companies attractive Sector contains many cyclical stocks IT 12.9% 11.0% UNDER UNDER 2.6% LCD panels to do well until Olympics Company guidance weakening sharply High raw materials prices squeezing margins Earnings forecasts to be revised down further Cons Discretionary 12.7% 10.5% UNDER UNDER 2.0% Structural consumer story in Asia intact Many stocks very export oriented Auto makers dependent on US consumer Materials 11.7% 12.0% NEUTRAL UNDER 2.7% Asian steel demand remains strong Commodity prices likely to be only mixed Telecoms 5.8% 8.5% OVER OVER -0.1% Non-cyclical growth story continues Regulatory risk Valuations back to reasonable levels Energy 4.6% 4.5% NEUTRAL OVER -5.7% Refining margins likely to improve further Oil stocks decoupled from crude price Regulatory risk as governments keep prices down Cons Staples 4.2% 7.5% OVER OVER 6.2% One of the most defensive sectors Valuations quite expensive Beneficiary of the Asian consumer story Utilities 4.2% 4.5% NEUTRAL OVER 10.5% Most defensive sector High input costs raise regulatory risk Health Care 3.5% 6.0% OVER OVER 8.0% Defensive, with strong structural growth Few large-cap stocks Source: HSBC (*Note that last quarter, cons discretionary, materials and industrials were bundled together under cyclicals (UNDER), and consumer staples, healthcare and utilities under defensives (OVER))
  3. Equity Strategy Asia Pacific abc Second Quarter 2008 Summary There are more uncertainties about the short-term outlook for Asian equities than usual. How long will risk aversion continue? How much will the US slow, and for how long? Will Asian earnings forecasts be cut? But there is little doubt that markets will continue to be tricky for some time. Even though the exact trajectory of the next nine months is hard to predict (for what it is worth, we expect another leg down followed by a second half rebound and a disappointing 2009), any outcome points to investors needing to be prudent and sticking to quality, structural growth stories at reasonable valuations. A bear market …but what kind? If it looks like a bear market and feels like a bear market, it probably is a bear market. At its low point in March, MSCI Asia ex Japan was down 29.6% from its peak last October. In our view, that puts it technically in bear market territory. And fundamentals over the next few months will point to the same conclusion: we expect one quarter of negative growth for the US in the first half, risk aversion to continue as credit markets remain dysfunctional for some time yet, international investors – who sold USD39bn of Asian equities in the past three months – to remain risk-averse, and inflation (now averaging over 6% in Asia ex Japan) to handicap some Asian central banks from cutting rates aggressively. But bear markets need not be that vicious. From among the three bear markets in Asian investment history, 1994 stands out as being relatively mild, with stocks bumping along the bottom for a year or so but without the stomach-churning drops seen in 1997-8 or 2000-1. We believe the chances are fairly high that 2007-8 will be a mild bear market too: the US will see growth slow to 1.5% this year but will (just) escape a technical recession, the US authorities have reacted quickly to tackle financial risks, Asian economic growth is likely to decouple to a degree from the US slowdown, and so far at least analysts’ Key changes in view To From Reason Lower Australia UNDER NEUTRAL Economy slowing while central bank raising rates; commodity outlook mixed Lower India NEUTRAL OVER Nervousness about H2 election; earnings forecasts may be revised down Raise Malaysia OVER UNDER Valuations now reasonable; post-election politics not so big a risk Lower Financials UNDER NEUTRAL Falling net margins, rising NPLs, futher US-related write-offs Lower Energy NEUTRAL OVER Regulatory risk: governments keeping retail energy prices down Source: HSBC 1
  4. Equity Strategy Asia Pacific abc Second Quarter 2008 forecasts for Asian earnings growth have hardly been revised down at all – suggesting we may avoid an earnings recession. The exact trajectory of Asian stock markets for the next six months is hard to forecast because there are so many uncertainties. Based on our US economists’ view of a “W-shaped” slowdown in the US, the most likely scenario in our view is one where credit problems over the next quarter cause a further leg down for Asian stocks, followed by a rebound in the second half, as the US economy responds to tax and rate cuts, but then a period of disappointment in 2009 as global growth remains sluggish and credit conditions stay tight. For this reason, we forecast just a 1% rise in MSCI Asia Pacific to year-end, but a slightly better 10% rise for the higher beta MSCI Asia ex Japan. Whatever the exact trajectory, it is clear we are in a different investment world to the gung-ho bull market of 2003-7. It is harder, but not impossible, for investors to make profits in such a market. Whatever type of bear market this turns out to be, though, the investment strategy should be the same. We see only two ways of playing this sort of market: (1) to trade in and out of the dips and rallies (since bear markets tend to be characterised by sharp, 10%-plus, rallies as investors try to spot the bottom); (2) to focus on quality, long-term structural growth stories (the Asian consumer, infrastructure, improving technology, healthcare etc), where stocks will fall enough to become available from time to time at attractive valuations. Market calls Transparent, stable, liquid, cheap – and changing In this sort of market, ideally we want to be invested in markets with (1) good earnings visibility, (2) low sensitivity to US growth, (3) loose monetary policy and strong liquidity, (3) attractive valuations, (4) low risk of structural problems, and (5) ideally, a non-correlated reason to outperform, such as political change. Obviously, no single market will have all these factors, but our country recommendations are based on those that have a good smattering of them (see our scorecard on p17). We continue to overweight China: PE has almost halved to 13x, earnings momentum remains positive and this year’s forecast of 21% growth should be comfortably achievable, and the risk of inflation accelerating is overdone. We like two markets where political change will help: Thailand and Korea (coincidentally, also the two cheapest markets in the region). In Thailand, the new democratically elected Index targets Index Current level Target end Upside Old end- Target end Upside vs Old end- 3/27/2008 2008 2008 target 2009 2008 2009 target Japan TPX Index 1,226 1,150 -6.2% 1,500 1,250 8.7% 1,600 Australia AS51 Index 5,372 5,500 2.4% 6,800 6,000 9.1% 7,500 China MXCN Index 64 75 17.4% 105 85 13.3% 120 Korea KOSPI Index 1,676 1,900 13.3% 2,200 2,200 15.8% 2,500 Taiwan TWSE Index 8,606 9,000 4.6% 8,200 10,000 11.1% 9,000 HK HSI Index 22,664 26,000 14.7% 31,000 29,000 11.5% 35,000 India Sensex Index 16,016 17,500 9.3% 23,000 21,000 20.0% 28,000 Singapore FSSTI Index 3,025 3,500 15.7% 4,000 4,000 14.3% 4,400 Malaysia KLCI Index 1,254 1,380 10.0% 1,500 1,500 8.7% 1,650 Thailand SET Index 823 950 15.4% 1,000 1,050 10.5% 1,200 Indonesia JCI Index 2,451 2,200 -10.3% 2,600 2,500 13.6% 2,900 Vietnam VNINDEX Index 509 600 17.9% 1,100 750 25.0% 1,300 MSCI Asia ex Japan MXFEJ Index 491 540 10.0% 570 613 13.6% 647 MSCI Asia Pacific MXAP Index 140 142 1.7% 177 158 10.7% 195 Source: HSBC 2
  5. Equity Strategy Asia Pacific abc Second Quarter 2008 Key country and sector recommended weights Cons Cons Health Financials Industrials IT Discretionary Materials Telecoms Energy Staples Utilities Care UNDER UNDER UNDER UNDER NEUTRAL OVER NEUTRAL OVER NEUTRAL OVER Japan UNDER UNDER UNDER UNDER OVER OVER OVER Australia UNDER UNDER UNDER UNDER OVER China OVER UNDER UNDER UNDER OVER OVER OVER Korea OVER UNDER UNDER OVER OVER OVER OVER OVER Taiwan UNDER UNDER UNDER UNDER OVER OVER OVER HK NEUTRAL OVER UNDER UNDER OVER UNDER India NEUTRAL UNDER OVER UNDER OVER OVER OVER UNDER Singapore OVER UNDER OVER OVER Malaysia OVER OVER OVER OVER Thailand OVER OVER OVER OVER OVER OVER Indonesia UNDER OVER NZ UNDER Philippines UNDER Pakistan UNDER Vietnam OFF-BMK OVER Source: HSBC government should survive longer than some people fear, and will spend to kick-start growth. Korea is a little cyclical for the current circumstances (so we recommend domestic plays, not exporters), but the policies of new president Lee Myung-bak look interesting and could be implemented quickly if he wins a parliamentary majority on 9 April. We have moved to overweight on Malaysia, where the earlier premium valuation has disappeared and where worries about political turmoil after the recent election are, in our view, exaggerated. This is Asia’s most defensive market, and can now be bought on a reasonable multiple. We stay overweight Singapore, which also offers an attractive combination of strong liquidity, low risk and PE well below the historic average. Perhaps our most non-consensus underweight is Taiwan, which almost every investor has got enthusiastic about after the KMT’s victory in the parliamentary election and Ma Ying-jeou’s election as president. We fear that cross-straits negotiations may not progress as fast as many expect. Moreover, Taiwan is the most cyclical market in Asia and its two main sectors, banks and technology (72% of market cap), are unattractive, although we do like retailers, construction, and chemical stocks. We stay underweight Japan: the economy is probably already in recession, and earnings are likely to fall this fiscal year because of the strong yen. We have lowered Australia to underweight from neutral: it may not prove as defensive this time as traditionally since it is very dependent on commodities, has a high weighting of banks in the index, and a very hawkish central bank. We stay underweight the two riskiest Asean markets, Indonesia and Philippines, both of which could have emergent inflation problems. We have lowered India to neutral, since valuations have not yet derated as much as the rest of the region, earnings forecasts (currently 20%) are likely to be revised down, and the election in H2 will cause jitters. Sector calls Stick to quality blue-chips We want to stick mainly to quality blue-chip names in the twin Asia structural growth themes of (1) consumption and (2) infrastructure. Many of these names sold off heavily in Q1, partly because they were heavily owned by foreigners, and partly because they had simply got too expensive in late 2007. Sectors such as Chinese telecoms or retailers underperformed hugely in Q1, which has brought valuations down 3
  6. Equity Strategy Asia Pacific abc Second Quarter 2008 to reasonable levels again. But the long-term growth stories have not been damaged. Mobile subscriber growth in China, for example, will not be dented even if the US goes into recession. The advantage of this sector allocation strategy is that it should be fairly defensive in the event of further market turmoil, but still partake in the ongoing Asian growth story over the long term and even perform well in the early stage of a market rebound. Specifically, we like consumer-related sectors, such as retailers and food producers, particularly in India, China and Korea. Healthcare offers a perfect combination (for the current market) of defensiveness and structural growth, aided by ageing populations and improving technology. We like pharmaceutical companies in Korea and Japan, but not in India. We continue to favour telecoms, where the structural growth story continues in India, China and some Asean markets like Indonesia and where valuations, which were stretched three months ago, are now attractive again. We like infrastructure stocks, since in many Asian countries (Thailand, Korea, Taiwan, India, China) political considerations will lead to a boost in government spending. For similar reasons, we like steel – perhaps our most contrarian call – because continuing demand from emerging markets means that producers should to be able to raise prices to more than offset the rise in raw materials costs. Sectors we would avoid include: technology (too exposed to US consumption, with earnings expectations that have just started to be cut sharply); financials (which we lower to underweight from neutral, since in many countries NPLs are rising, net margins are falling, and more surprise losses in overseas securities investment are possible), and cyclical exporters (because of the risk of further global economic weakness). We have cut energy to underweight from neutral because, though crude oil prices may stay high, governments’ moves to keep retail energy prices down will hurt profits since refiners may not be fully compensated. We are also cautious on resources (neutral) since we see metals prices being only mixed over the next few months. Stock picks For high-conviction buy ideas, too, our focus is on quality, blue-chip stocks, which are well positioned to benefit from Asia’s long-term structural growth story but which will not suffer too much if markets remain tricky. Many saw share prices drop in Q1 and now represent excellent value. For example, we include two quality telecoms companies – China Mobile and Singapore Telecoms – as well as companies that will benefit from consumption growth in China and Korea (respectively, New World, Maruti Suzuki and KT&G). BHEL is a play on Indian infrastructure. Our choices are mostly fairly defensive – although we leaven this with the inclusion of Posco and Nanya Plastics. With markets having fallen so far, it is harder to find clear sell ideas than it was a quarter ago. We accordingly delete China Life and Angang Steel from last Quarterly’s list (both have fallen substantially over the past three months). We replace them with two stocks that are still too expensive after previously over-hyped expectations: Nalco and Eva Airlines. 4
  7. Equity Strategy Asia Pacific abc Second Quarter 2008 HSBC’s top 10 high-conviction buy ideas Code Name Country/ Sector HSBC rating Upside Price Market region to target (local curr) cap price (%) 1 Apr (USDm) 941 HK CHINA MOBILE LTD CH Telecoms Overweight (V) 25.7 117.70 (HKD) 302,769 3328 HK BANK OF COMMUNICATIONS CO-H CH Financials Overweight (V) 22.0 9.26 (HKD) 27,422 825 HK NEW WORLD DEPT STORE CHINA CH Consumer Overweight (V) 39.1 8.84 (HKD) 1,914 BHEL IN BHARAT HEAVY ELECTRICALS IN Industrials Overweight (V) 71.8 1,892.20 (INR) 23,087 MSIL IN MARUTI SUZUKI INDIA LTD IN Autos Overweight 50.2 815.75 (INR) 5,874 000640 KS DONG-A PHARMACEUTICAL CO LTD KR Healthcare Overweight 19.4 107,000.00 (KRW) 1,115 033780 KS KT&G CORP KR Consumer Overweight 25.2 77,000.00 (KRW) 11,015 005490 KS POSCO KR Materials Overweight 49.6 468,000.00 (KRW) 41,471 ST SP SINGAPORE TELECOMMUNICATIONS SG Telecoms Overweight 14.4 3.96 (SGD) 45,738 1303 TT NANYA PLASTICS TW Materials Overweight 46.3 73.80 (TWD) 18,578 Source: HSBC Top sell ideas Code Name Country/ Sector HSBC rating Upside Price Market region to target (local curr) cap price (%) 1 Apr (USDm) NACL IN NATIONAL ALUMINIUM CO LTD IN Metals Underweight (V) -22.5 462.10 (INR) 7416 2618 TT EVA AIRWAYS CORP TW Transportation Underweight -20.9 18.80 (TWD) 2,429 Source: HSBC 5
  8. Equity Strategy Asia Pacific abc Second Quarter 2008 Contents Investment strategy 7 Taiwan (underweight) 44 What kind of bear? 7 Excessive expectations 44 Earnings 18 Hong Kong (neutral) 48 No big downward revision yet 18 Negative real rates to help 48 Valuation 20 India (neutral) 52 Massive derating 20 Hold on 52 Supply and Demand 22 ASEAN (overweight) 56 Massive foreign selling 22 Interesting opportunities 56 Politics and risk 24 Sectors & Stocks 64 Attention shifts to India, Japan 24 Focus on quality 64 Quantitative scorecards 68 Country profiles 27 Top stock picks 72 Japan (underweight) 28 What to buy – and what not 72 Gloomy and depressing 28 Appendix 86 Australia (underweight) 32 Higher rates, lower growth 32 Disclosure appendix 88 Korea (overweight) 36 Disclaimer 92 Attractive – despite the cycle 36 China (overweight) 40 Long-term value emerges 40 6
  9. Equity Strategy Asia Pacific abc Second Quarter 2008 Investment strategy It seems fairly clear that we are in a new world: a bear market But what sort of bear is harder to tell. What further consequences of the credit crunch will emerge? Will the US recession be short or drawn-out, shallow or nasty? How resilient will Asian growth, particularly earnings growth, be? From an investor’s point-of-view, this may not matter. In almost any bear market scenario, investors should either (1) trade the ups and downs, or (2) stick to quality stocks with good long-term growth prospects, some of which are cheap again What kind of bear? came in in line with expectations at 21%; and forecasts for 2008 earnings growth have stayed “In theory, there is no difference between theory fairly steady. Yet, MSCI Asia ex Japan fell 13% and practice. In practice, there is.” Yogi Berra in dollar terms over the quarter (15% in local The first quarter was a peculiar one for Asian currency terms) and the forward PE ratio derated stocks. Economic fundamentals continued to look from 15.6x at the end of last year to 12.1x at the strong (with average exports, for example, still lowest point in March. growing 12% y-o-y); earnings results for 2007 1. MSCI Asia-Pacific and MSCI Asia ex Japan (in dollars) vs MSCI World 200 Asia ex Japan rel to MSCI World Asia Pac rel to MSCI World 180 160 140 120 100 80 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Source: HSBC, Bloomberg 7
  10. Equity Strategy Asia Pacific abc Second Quarter 2008 The theory of economic decoupling therefore about how much the US (and, by extension, the looks to have some validity but, in practice, global global) economy will slow, and about how long risk aversion has meant that international the side-effects of the dysfunctional credit investors have pulled significant amounts of markets will continue and where they will emerge money out of Asia (USD39bn in January-March next. That means that volatility (which has risen in the eight markets that provide data – which do to 30-40% from the 10-15% level at the start of not include China or Hong Kong). With Asia 2007, see Chart 3) will continue to be high, and being a higher beta region than more developed the upside for the market will be, at best, limited markets, it fell further – the US was down 10% compared to the past few years. and Europe 11%. 3. Average 10-day historic volatility of Asia Pacific indexes After a period of such shocks, it seems highly 60 Av erage unlikely, in our view, that markets will return to 50 normality smoothly. We probably have to accept 40 that the bull market which began in April 2003 30 (or, some might argue, September 2001) is over. 20 Through most of this period, economic growth in Asia accelerated, earnings rose steadily, and 10 valuation multiples expanded (see Chart 2). Stock 0 market corrections were treated as opportunities 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 to buy. Bad news was generally shrugged off. Source: HSBC, Bloomberg International investors increased allocations to emerging markets; domestic retail investors in This does not necessarily mean, however, that many countries discovered the joys of equity equity returns will be disastrous. We do not investment for the first time. Investors were happy believe the most pessimistic scenarios which to take more risk: fund managers who were too suggest that credit-related losses will reach 5% or cautious (with too much cash or too little 10% of US GDP (i.e. USD600bn-1.3trn), leverage) underperformed. triggering the worst recession since World War 2. Prospective PE and absolute EPS for MSCI Asia ex-Japan Two. The US authorities have reacted remarkably quickly to address the problems. We expect, for 50 20 example, that the US Fed will cut rates to 1% by 40 early 2009. Moreover, HSBC’s economists look 15 30 for US growth to slow only moderately to 1.5% 10 this year and 1.2% next – a double-dip “W- 20 shaped” pattern – but to avoid a technical 5 10 recession. In Asia, growth is likely to slip a little EPS PE (RHS) 0 0 too but nonetheless remain impressive: we 02 03 04 05 06 07 08 forecast overall real GDP growth for Asia ex Japan to slow to 7.8% this year and 7.8% again in Source: HSBC, Datastream, IBES 2009, down from 9.1% in 2007 (see HSBC’s Q2 Asian Economics Quarter: The gathering storm That world is over. For the next few quarters, fear for details). will predominate over greed. Investors will worry 8
  11. Equity Strategy Asia Pacific abc Second Quarter 2008 But bear markets – for that is probably what we 4. Corrections 2004-7 are now in – have their own dynamic. They are 120 characterised by sharp rallies, as investors try to 110 pick the bottom, followed by scary plunges. 100 Sector and style performance behave rather 90 differently to a bull market. Bear markets tend to drag on for longer than most people expect. But 80 they don’t always produce dramatic declines in 70 stock indexes. We will argue below that this is -50 -25 0 25 50 75 100 125 150 04 06 likely to be a rather mild bear market for Asia. Jul 07 Oct 07 And bear markets do create opportunities too: Source: HSBC, Bloomberg investors can make money by trading in and out of the dips and rallies, or by focusing on stocks By contrast, this time the market bottom (to date) that are attractive from a long-term perspective came as much as 100 days after the top, there but which get sucked down with the overall have already been three clear down-legs as well as market decline to become cheap. two sharp rallies. The pattern is starting to look Is it a bear? much more like the three bear markets that have taken place in Asia ex Japan (see Chart 5) since There is no clear definition of what differentiates the region became open to international investors: a market correction from a bear market. 1994, 1997 and 2000. On these three occasions, it Strategists in the US usually define a correction as took 274, 304 and 448 trading days for the index a drop in the index of 10-20%, and a bear market to bottom. It fell in total 33%, 69% and 56% on as a drop of more than 20% (on this basis, the these three occasions respectively. It is important S&P500, which has fallen 18.6% from peak to then, if we accept that the current market is a bear, trough, is still only in correction territory). to work out what sort of bear. We will come back Since Asia is a more volatile market (volatility to this issue later. over the past 10 years has been 1.44x that of the 5. Bear markets in MSCI Asia ex Japan US), we would adjust those definitions to say that a correction is a 14% decline, and a bear market a 110 100 decline of more than 29%. On that basis, MSCI 90 Asia ex Japan just dipped into bear market 80 70 territory in March – at its low point it was down 60 29.6%. 50 40 The pattern of the market over the past five 30 months, since its peak on October 29, has looked -50 0 50 100 150 200 250 300 350 400 450 500 more like a bear market than a correction too. 94 97 00 07 Chart 4 shows the three corrections (using our Source: HSBC, Bloomberg definition above) in the 2003-7 bull market (with the market peak shown as 100 at Day 0); the We are not chartists and so don’t want to rely just recent market movement shown in red. In each of on what index trading patterns tell us. But recent the three corrections, the market bottomed within market fundamental characteristics also point to 25 days and had only one leg down. 9
  12. Equity Strategy Asia Pacific abc Second Quarter 2008 this being a longer, more serious downturn than have not (yet) fallen sharply. The just an intra bull market correction: manufacturing ISM index, for example, remained at 48.6 in March, only just below Measures of risk aversion have continued to the cut-off line of 50 (Chart 7). It seems deteriorate, despite the efforts of the Fed to inevitable that this will fall to at least 45 over inject liquidity and rescue insolvent the coming months. Although the correlation investment banks. The average spread on of Asian equity markets with the ISM has Asian corporate bonds has risen to 350bp weakened somewhat recently (decoupling?), from 240bp at the start of the year (Chart 6). it is hard to imagine that a further fall in the Equities have largely moved in line with this ISM would not worry investors in Asian measure of risk, except for a short period in stocks. Q4 last year. Our credit strategists argue that the worst may be over for credit and that 7. US ISM Manufacturing index vs MSCI Asia ex Japan spreads may peak this quarter, which could 65 80% provide support for equities. Indeed, the 60% 60 spread narrowed by about 20bps in the last 40% 55 20% week of March after JP Morgan bought Bear 50 0% Sterns. We believe, though, that the full -20% ramifications of the credit crunch have not yet 45 -40% appeared: we expect new problems in the 40 -60% 1990 1993 1996 1999 2002 2005 2008 areas of credit default swaps and private equity, more write-offs from financial ISM Manufacturing (LHS) MXFEJ y /y institutions, and the first signs of trouble from Source: HSBC, Bloomberg corporate borrowers struggling to raise funds. 6. Asian dollar bond spread vs MSCI Asia ex Japan Monetary policy will be complicated by inflation. Although the Fed is aggressively 650 50 100 cutting rates, in Asia Pacific, some central 550 150 banks are still focused on combating inflation: 450 200 Australia and Taiwan both raised rates in 350 250 March; China, Vietnam, and Indonesia 300 remain in tightening mode. With average 250 350 Asian inflation (ex Japan) having risen to 150 400 6.3% in February (see Chart 8), central bank 2000 2001 2002 2003 2004 2005 2006 2007 2008 decision-making is not straightforward. And MSCI Asia ex J ADBI spread (RHS, inv erse) this environment is throwing up other Source: HSBC, Bloomberg problems: a shortage of rice throughout the region, government controls on retail prices Global economic data is likely to weaken of essential goods which could negatively further. Our economists expect real GDP affect the profitability of producers, extreme growth in the US to drop to -0.5% q-o-q currency movements (for example, in Korea annualised in Q2, after 0.5% in Q1 and 0.6% or Vietnam in March) as foreigners chase in Q4 2007. It is one surprising factor in the high-yielding instruments in appreciating past few months that US cyclical indicators currencies, and increasing difficulties in 10
  13. Equity Strategy Asia Pacific abc Second Quarter 2008 sterilising currency intervention as US rates 9. Cumulative net flows into Asian equities fall below those in Asia. 350 300 Japan Asia ex -Japan 8. Average CPI inflation in Asia ex Japan 250 14 200 $ bn 12 150 10 100 50 8 0 6 -50 4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2 0 Source: HSBC, Bloomberg -2 97 98 99 00 01 02 03 04 05 06 07 08 It is hard to imagine that these worries will Source: HSBC, Bloomberg disappear overnight. A period of consolidation is needed before investors will be willing Foreign flows. Risk aversion means that an aggressively to take risk again. In a sense, over unprecedented amount of capital has been the coming months bad news will be good news withdrawn from Asia over the past few because it will mean the market is getting closer months (Chart 9). This year so far, foreign to absorbing all that the global environment has to investors have sold USD20bn of Japanese throw at it. Clear signs of a US recession, further stocks, USD14bn of Korean ones and large write-offs by banks or news of new distress USD3bn in India. Only Taiwan and Vietnam in the credit market would, paradoxically, be have escaped the sell-off. Emerging Portfolio welcome because they would bring us nearer to Fund Research reports that Asia ex Japan the end of the worst. mutual funds globally saw outflows of USD12bn in Q1 (and Japan funds outflows of What do bears look like? USD6bn). China and Greater China funds, in Bear markets typically go through six phases: particular, saw outflows of USD5.4bn. After that degree of selling, past experience is that Denial. Investors remain euphoric after a long it takes around six months before retail run-up and treat the market decline as a investors have enough confidence again to buying opportunity. This happened in start to put their money back into the market. November and December last year, when Mutual funds are unlikely to be significant equity markets in Asia rebounded despite buyers of Asian equities for a while yet. By worsening credit market conditions. contrast, money market funds saw a Inaction. Investors become confused and remarkable USD141bn of inflows during the professional fund managers, in particular, sit quarter. on their hands as they puzzle how to handle the situation. This happened from late 2007, as witnessed by declining turnover in Asian markets (Chart 10). 11
  14. Equity Strategy Asia Pacific abc Second Quarter 2008 10. Total daily turnover (USDbn) of Asia ex Japan markets 11. Rallies in the 2000-1 bear market 100 350 Top AEJ 80 10.2% 300 60 250 13.9% 10.5% 40 10.8% 200 20 15.3% Bottom 0 150 Oct-06 Oct-07 Oct-00 Oct-01 Jan-06 Apr-06 Jul-06 Jan-07 Apr-07 Jul-07 Jan-08 Jan-00 Apr-00 Jul-00 Jan-01 Apr-01 Jul-01 Source: HSBC, Bloomberg Source: HSBC, Bloomberg Panic. Investors realise they are losing Capitulation. The bottom-spotting rallies significant amounts of money and start to peter out leaving even more investors offload shares. This happened in the early part depressed about the long-term future of equity of 2008, especially among retail investors in investment. Retail investors put their money Hong Kong (who had leveraged in bank deposits, institutional funds raise their “accumulator” positions on H-shares). It may cash holdings, strategists talk about this being be happening now in China, India, and the worst bear market for 50 years. In our Vietnam. This can be accompanied by an view, we haven’t reached this stage yet this increase in volumes, as stock sales hit the time. market. The rebound, when it comes, often doesn’t Bottom-spotting. At quite an early stage in require a specific catalyst, just enough people the bear market, investors start to play the to have turned bearish and valuations to have game of anticipating where it will bottom. If got cheap enough that the attraction of you get this right, it can be very profitable equities reappears. since the first leg-up of a recovery is often But what sort of bear? extremely sharp. The process of bottom- spotting generally causes sharp rallies. In the The three previous bear markets in Asia were all 2000-1 bear market, for instance (see Chart very different in nature as well as in magnitude 11), there were five rallies of 10% or more. (as can be seen by referring back to Chart 5, and This time, there have already been two well as from Chart 12 below). (January-February and late March). 1994: shallow. The 1994 bear market was triggered by excess valuations in Asia (forward PE for Asia ex Japan had reached 25x), and by the Fed raising rates sharply as the US came out of recession. US economic growth slowed moderately in 2004-5, but Asian growth remained resilient. The market peaked in January 2004, continued to drift off until January 2005, and then bounced only 12
  15. Equity Strategy Asia Pacific abc Second Quarter 2008 fairly weakly over the following year, rising pattern like 2000-3 in Asia, where stocks 30% – it did not regain its 1993 high until rebound, as they did in H1 2002, on the belief 2007! that the US economy is recovering, but that ultimately this belief proves to be unfounded 1997: short and nasty. The 1997 bear and they give back (most of) their gains. This market, which began in July 1997, was is not an unfeasible scenario for the second caused by structural economic problems in half of this year if the Fed’s rate cuts and Asia (and was largely unlinked to events in fiscal stimulus have a (temporary) positive the rest of the world). The index fell 60% in effect on growth. the first six months, rallied but then had another leg down, before bottoming in How immune Asia will be from the global September 1998. The recovery was equally slowdown (the decoupling argument). steep, driven by the TMT bubble – but again To what extent further bad news emerges did not get back to the 1997 peak until 2006. from the dysfunctional credit market. 2000: deep and protracted. The 2000 bear How far the Fed will be prepared to go to bail market was the reaction to high valuations out ailing financial institutions (including and excess capital spending globally during perhaps, later, hedge funds or other the TMT bubble in 1999. It was the most investment institutions). protracted of the three, lasting from February 2000 to October 2001. It then had a 50% How big a psychological impact the Fed’s rally, but almost sank back to its October actions will have on banks’ willingness to 2001 low again in both October 2002 and lend, consumers’ enthusiasm to spend, and March 2003. corporate managers’ judgement on capex. 12. Previous bear markets in MSCI Asia ex Japan How much earnings are cut in Asia. 700 Risk aversion, not earnings recession 600 So far at least this bear market has been marked 500 purely by risk aversion, and has not been 400 accompanied by a significant slowdown in 300 earnings growth. It is true that analysts’ forecasts 200 100 for 2008 EPS growth have slipped to 8.4%, down 0 from 10.5% at the end of last year (and much 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 lower than 2007’s 20.8%). But mostly this is due to a base effect, since last year’s results came in a Source: HSBC, Bloomberg little above consensus forecasts and, at this time of the year during the results season, it can take So what will this bear market be like? For the analysts a while to adjust next year’s forecasts. In moment, we think it is hard to tell. The length and absolute terms, 2008 EPS has been cut just 3% depth will depend on many factors: from the peak in November. As Chart 13 shows, How much the US economy slows and for earnings forecasts are no longer being revised up how long. Our economists’ forecast of a W- as they were throughout 2007 – but neither are shaped growth trajectory, would suggest a they being slashed. 13
  16. Equity Strategy Asia Pacific abc Second Quarter 2008 13. Consensus forecasts of Asia ex Japan EPS by year PE (i.e. risk aversion) rather than by deteriorating 40 growth expectations. PE fell from 15.6x at the '08 '07 start of the year to 12.4x; EPS growth 35 expectations have been cut from 10.5% to 8.4%. Put another way, if PE had stayed at its end-2007 30 '06 level through the first quarter, with the earnings 25 growth the consensus now expects, we would still '05 be looking at a market return for the year of 8% or 20 so. 04 05 06 07 08 14. Earnings growth and valuation scenarios Source: HSBC, Datastream, IBES PE (x ) 18 17 +20% This is a very different experience to previous 16 Jan +10% bear markets. In 1997, for example, by November 15 14 0% – only four months after the market had peaked – 13 analysts had already revised down their 1997 B -10% 12 Apr estimates by 25% and 1998 estimates by 22%. 11 C -20% A Within six months of the market peak, 1997 and 10 1998 forecasts had been lowered by 46% and 31% 2% 4% 6% 8% 10% 12% 14% EPS grow th respectively. Source: HSBC Analysts were almost as quick in 2000. The stock market peaked in February 2000, and the US What possible scenarios are likely from here? economy started to slow only in March 2001 Given the uncertainties we described above, only (according to the NBER definition of a recession). a fool would claim to have a clear idea of the But by July 2000, analysts had already cut their exact trajectory of the market over the next nine forecasts for that year by 17% and for 2001 by months. We would offer three possible paths for 21%. Admittedly, 2000 came in 16% worse in the this bear market: end than analysts believed in July, but they cannot Scenario A: “Asian economic decoupling”. be accused of reacting slowly. Earnings stay robust, with analysts seeing no Patterns for the rest of 2008 need to cut forecasts. But credit market An aid to thinking about risk aversion versus worries and further withdrawal of foreign earnings growth is shown in Chart 14. Here funds from Asian markets cause PEs to fall possible index changes in 2008 (starting from 1 further. Asian stock markets fall further to January, not from now) are shown as a factor of year-end. (1) EPS growth on the x-axis, and (2) the year-end Scenario B: “Bouncing along the bottom”. PE on the y-axis. The index change at each The worst of the credit crunch is over in Q2 combination of PE and EPS growth is shown by and so risk aversion eases a little, allowing the horizontal curves. PEs to rise slightly. However, a mild It is clear here how the decline in the first three slowdown in the US causes Asian earnings months of the year was caused mostly by a falling expectations to be moderately revised down. Asian stock indexes pick up modestly in H2. 14
  17. Equity Strategy Asia Pacific abc Second Quarter 2008 Scenario C: “The nasty bear”. The credit second quarter, followed by a recovery in H2 as crunch continues to worsen and, in the face of US economic data start to look better and credit a sharp global slowdown, Asian earnings concerns ease, but then a further period of growth is at risk. Analysts cut forecasts weakness next year as bank lending and risk- aggressively. The index falls further. taking globally remain cautious and the US economy double-dips. That is why we have index The other feasible possibilities on the chart – targets for end-2008for MSCI Asia Pacific only significant upwards revisions to earnings, or a 1% above the level – although we are a little more dramatic recovery in risk-taking which pushes PE optimistic on MSCI Asia ex Japan, where we up to where it was at the start of the year – seem target a 10% rise. In terms of the scenarios above, highly unlikely to us. this would look like A, followed by B.) The three previous bear markets showed very Whatever the trajectory, we see only two ways different patterns (Chart 15). In 1994, earnings that investors can approach this market – both growth was about flat but PE fell by 20%. The very different from how one should behave in a 1997 bear market saw the nastiest combination of bull market. a big fall in earnings plus multiple contraction, but in the following year PEs rebounded although Aggressively trade the rallies and dips. Get earnings fell further. In 2000, earnings continued the timing right and this can be very to grow robustly but valuations were dramatically profitable – although it is also hard. There derated as the tech bubble burst; note, though, that will be individual country or sector themes earnings did fall sharply in 2001, when PEs that will run for a few weeks. The whole remained at their lower level. Asian market will get over-sold or excessively cheap from time to time. (To 15. Annual return, disaggregated into change in PE and EPS allow ourselves to help clients in these 60 98 decisions, from this Quarterly we have 40 99 03 simplified the way we present our sector and 20 01 0506 07 country recommended weightings, which will 96 PEg 0 allow us to change them quickly intra-quarter, 95 04 -20 97 94 whenever we see an attractive opportunity.) 02 -40 00 Stick to long-term growth stories – many of -60 which will be available to pick up from time- -60 -40 -20 0 20 40 60 EPSg to-time at bargain-basement valuations. The old Asian stories of the past few years – Source: HSBC, Datastream, IBES endogenous growth, the growing middle The result is the same class, increased infrastructure spending, more sophisticated financial services, the In a way, once we have agreed that the next year development of global brands, improvements or so will continue to be difficult, the exact type in home-grown technology – will not go of bear market doesn’t matter very much from the away. But our advice would be to stick to point-of-view of investment strategy or asset quality: blue-chip companies, with strong allocation. (For what it is worth, we see as the balance-sheets, good management, a leading most likely scenario a further leg-down in the competitive position in their markets, and 15
  18. Equity Strategy Asia Pacific abc Second Quarter 2008 16. Market scorecard Monetary Earnings Politics Sensitivity to Valuation Structural Long-term TOTAL Rank policy visibility US/global growth worries story Weight 20% 10% 20% 10% 15% 15% 10% 100% JP 1 -2 -3 -2 0 1 -1 -0.75 13 AU -2 -1 0 -1 1 1 1 -0.20 10 KR 0 -1 2 -1 1 0 1 0.45 4 CH -1 0 1 1 1 0 3 0.55 3 TW -1 -2 1 -3 1 1 1 -0.10 8 HK 2 0 0 -1 -1 1 1 0.40 5 IN 0 1 -1 3 -1 -1 2 0.10 6 SG 1 1 0 1 2 2 1 1.10 2 MY -1 1 -1 2 1 -1 1 0.00 7 ID -2 1 1 2 -1 -1 1 -0.10 9 TH 1 1 3 0 1 0 1 1.15 1 PH -1 1 -1 0 0 -1 1 -0.35 11 VN -2 -1 0 -1 0 -2 2 -0.70 12 Source: HSBC often with an attractive dividend yield. In the were the two best performing markets in Q1 country pages and the sectors and stocks (although Korea has yet to reflect what we see section of this Quarterly, we have tried to as the much better political outlook presented identify such themes. by its new president – but perhaps it will if his party wins a majority in the parliamentary As far as country allocation is concerned, we stick election on 9 April). to some of the themes we identified in our Q1 Preview of 2008: In the new market environment, ideally we would want to invest in countries with all these Implications of monetary policy. Countries characteristics. We have tried to quantify them with dovish central banks and only moderate approximately in Table 16. For each category, we inflation will look more attractive for equity scored from -3 to +3, based on the impact on the investors than those where the central bank is stock market. We weighted the categories, particularly hawkish or where inflation is depending on how important each was in the getting out of hand. current environment (for example, the long-term Endogenous growth. We prefer markets with growth story is probably less important currently domestically driven growth, and low than the lack of structural worries). dependence on exports. Readers will doubtless disagree with our A sprinkling of value. One lesson of Q1 was judgements, but this scorecard enables us to make that when markets get too expensive (as, for a rough call on which markets now look attractive example, India or Malaysia clearly were), (Thailand, Singapore, and China, for instance), they can sell off dramatically on only mildly and which are better avoided (Japan, Vietnam, the negative news (sadly, this doesn’t seem to Philippines, and Australia). We loosely based our work in reverse with very cheap markets). country weight recommendations this quarter on these results. Political change. Looking for non-correlated reasons for a country to perform (“market alpha” perhaps), political change is the easiest to spot. This was why Taiwan and Thailand 16
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  20. Equity Strategy Asia Pacific abc Second Quarter 2008 Earnings 2007 EPS growth came in roughly in line with forecasts Forecasts for 2008 have been remarkably stable But there are signs of downgrades in Japan, Taiwan and Korea No big downward revision yet corporate tax cut (which raises net profit by about 6%) are taken into account. The forecast of 20% Despite the recent fall in stock markets, earnings growth in India, however, may be a little harder to forecasts have remained remarkably resilient. EPS achieve if economic growth slows, as we forecast, growth in 2007 seems to have come in roughly to only 7% and if the central bank does not cut where analysts forecasted three months ago, 21%. rates. But, more importantly, the 2008 forecasts have hardly budged: they have been revised down just But as a result of these changes, there has been a 1% over the past three months, with analysts now slight deterioration in earnings momentum (Chart expecting 8% growth this year for Asia ex Japan 3 – the change over the past six months in the 12- (compared to 11% at the time of the last quarterly. month forward EPS forecast). Partly because this year’s growth is forecast to be only half of last Within these numbers, however, there is quite a year’s, momentum has slipped from a peak of lot of divergence between markets. The more 14% late last year to only 9% and will slip further cyclically-sensitive economies have indeed seen unless 2008 forecasts are revised up. The market downward revisions (Table 5). Most notably, has in the past reacted quite sensitively to analysts have revised down 2008 (calendarised) momentum. It is also slightly concerning that 57% forecasts for Japan by 12% over the past three of analysts’ revisions have been downward since months. However, in our view, the current the start of the year (Chart 4). Downward forecast of 9% growth for this year will be hard to revisions have been particularly noticeable in achieve in the face of the strong JPY. From a top- Taiwan (79% of all revisions) and Korea (62%). down perspective, we forecast that Japanese On the other hand, analysts continued to revise up earnings will decline this year. Forecasts for in India, Hong Kong, Indonesia, and Malaysia. Taiwan, Australia, and Korea have also been revised down over the past few months. Our conclusion is that so far there are few signs of an earnings recession, although more significant By contrast, forecasts for China and India downward revisions are possible in the coming continue to be revised up slightly, by 2% and 1%, months. respectively, over the past three months. The consensus forecast for MSCI China this year (EPS growth of 21%) seems achievable to us if currency appreciation (say, 8% in 2008) and a 18



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