2011 Outlook for Asia: Daiwa

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Asia’s long-term winners
Summary
􀂃 It may not feel like it, but by the standards of the past few years, 2010 has been a subdued
year for equities in Asia – at least as measured by the change in the MSCI Asia ex-Japan
index. The 16% YTD rise in the index (to 3 November) looks positively sleepy compared with
the +34%, - 52%, +66% movements of 2007, 2008 and 2009, respectively.


􀂃 The IBES-consensus forecasts look for Asia ex-Japan annual EPS growth to slow to 13-14%
for 2011 and 2012 from an expected 38% this year, with the waning of the earnings rebound
that followed the credit crisis-induced collapse. This is mirrored in Daiwa’s economic forecasts,
which look for Asian GDP growth rates to decelerate to slightly above trend in 2011 and 2012,
after an exceptionally strong 2010.
􀂃 The big question now is whether the liquidity generated by the US Federal Reserve’s (Fed)
latest quantitative easing will slosh over into emerging markets in search of higher returns. We
believe it will, and that this positive liquidity environment should support valuations. In 2010,
the MSCI Asia ex-Japan has lagged earnings growth, leading to a moderate PER contraction.
With that index now trading on what we regard as an undemanding 13.2x PER on the IBESconsensus
one-year forward earnings forecasts, markets should at least move up in line with
earnings growth.
􀂃 However, 2011 will not be without risks. While we expect Asian currencies to appreciate by up
to 6% in 2011, central banks are likely to take action if they see hot-money inflow forcing up
their exchange rates to levels that they believe threaten their competitiveness. China will
remain the primary target for the wrath of Western politicians if it is perceived to be
manipulating its exchange rate. If the US economy has not responded to the quantitative
easing by the time it runs out in the middle of the year, the rhetoric is likely to get louder.
􀂃 Nevertheless, in 2011, we believe the centre of gravity of the global economy will continue to
shift toward Asia, where current-account and balance-of-payments surpluses will remain
robust and domestic-demand growth will continue to be a powerful theme.