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Asia ex-Japan Strategy
Useful correction...oily aftertaste
Oil drags out an Asian correction that was nearly done
Just when a biddish tone was starting to creep back into Asia ex-Japan
equities by late last week, oil had to surge higher and complicate things. You
can’t have a sudden, non demand-driven 6-8% price increase in the world’s
key energy resource without consequences for the value of productive assets.
Yet we should keep oil’s absolute price level in perspective: Even just above
US$100/bbl, crude remains within our 2011 forecast range and still well below
levels that our economics team believes would imply significant demand
destruction. It’s probably the ‘tail risks’ of widening Middle East instability that
gripped markets this week – not the current oil price itself.
Moreover, consensus top-down concerns over Asian tightening and slower
growth are pointedly not trickling down to the company level: A decent
December-quarter results season now underway across the region is helping
bolster sentiment, with analysts in most markets (India being the key
exception) busy upgrading their 2011 and 2012 earnings forecasts. Upgrades
have been most robust in growth-sensitive sectors such as Energy and Tech.
Front-loading the pricing of 2011’s key risks
Thus far, we have deliberately avoided parroting the market’s more extreme
inflation sensitivities, seeing the quick flip from last year’s “double-dip” fears
over to current “overheating” concerns as hasty. To be sure, the unprecedented
(and ongoing) easy-money response to the late global crisis tilts the balance
of risks decidedly toward inflation, but we have also noted factors that help
contain the threat for much of Asia. These include i) de-bottlenecking as a
result of massive crisis-period infrastructure investment; ii) local currency
appreciation; and iii) substantial firm-level capacity expansion.
We see the selling pressure that has set the MSCI Asia ex-Japan index back
some 7% since January as having helped front-load much of the riskdiscounting
for 2011, potentially “clearing the decks” for firmer performance
into mid-year: With regional PER multiples now 5% below the 12.5x long-term
average, stocks are far more conservatively positioned than during the 2007
inflationary episode, when Asia was at a precarious two-standard-deviation
premium 17x. Nor do we see good evidence for the now shopworn argument
that US equities are cheap relative to emerging Asia. Quite the opposite.
Rather than a self-inflicted rollover, Asia’s current tightening strikes us more
as prudent rebalancing back to a more diversified growth pattern now that
exports to developed markets are getting onto a firmer footing. In other words,
Asia is largely just giving itself the tightening “it can now afford” as global
recovery proceeds. Pretty mid-cycle stuff, the way we see it.
Sell-down has opened value in select names
Despite recent macro-driven volatility, the healthy EPS upgrade pattern keeps
us satisfied with our regional sector Overweights in Tech, Energy, Industrials
and Financials. Indeed, the late sell-down has opened up compelling value
and/or boosted dividend yield in several names that we continue to favour,
such as Shinhan Financial, Asustek, and PTT Chemical
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia ex-Japan Strategy
Useful correction...oily aftertaste
Oil drags out an Asian correction that was nearly done
Just when a biddish tone was starting to creep back into Asia ex-Japan
equities by late last week, oil had to surge higher and complicate things. You
can’t have a sudden, non demand-driven 6-8% price increase in the world’s
key energy resource without consequences for the value of productive assets.
Yet we should keep oil’s absolute price level in perspective: Even just above
US$100/bbl, crude remains within our 2011 forecast range and still well below
levels that our economics team believes would imply significant demand
destruction. It’s probably the ‘tail risks’ of widening Middle East instability that
gripped markets this week – not the current oil price itself.
Moreover, consensus top-down concerns over Asian tightening and slower
growth are pointedly not trickling down to the company level: A decent
December-quarter results season now underway across the region is helping
bolster sentiment, with analysts in most markets (India being the key
exception) busy upgrading their 2011 and 2012 earnings forecasts. Upgrades
have been most robust in growth-sensitive sectors such as Energy and Tech.
Front-loading the pricing of 2011’s key risks
Thus far, we have deliberately avoided parroting the market’s more extreme
inflation sensitivities, seeing the quick flip from last year’s “double-dip” fears
over to current “overheating” concerns as hasty. To be sure, the unprecedented
(and ongoing) easy-money response to the late global crisis tilts the balance
of risks decidedly toward inflation, but we have also noted factors that help
contain the threat for much of Asia. These include i) de-bottlenecking as a
result of massive crisis-period infrastructure investment; ii) local currency
appreciation; and iii) substantial firm-level capacity expansion.
We see the selling pressure that has set the MSCI Asia ex-Japan index back
some 7% since January as having helped front-load much of the riskdiscounting
for 2011, potentially “clearing the decks” for firmer performance
into mid-year: With regional PER multiples now 5% below the 12.5x long-term
average, stocks are far more conservatively positioned than during the 2007
inflationary episode, when Asia was at a precarious two-standard-deviation
premium 17x. Nor do we see good evidence for the now shopworn argument
that US equities are cheap relative to emerging Asia. Quite the opposite.
Rather than a self-inflicted rollover, Asia’s current tightening strikes us more
as prudent rebalancing back to a more diversified growth pattern now that
exports to developed markets are getting onto a firmer footing. In other words,
Asia is largely just giving itself the tightening “it can now afford” as global
recovery proceeds. Pretty mid-cycle stuff, the way we see it.
Sell-down has opened value in select names
Despite recent macro-driven volatility, the healthy EPS upgrade pattern keeps
us satisfied with our regional sector Overweights in Tech, Energy, Industrials
and Financials. Indeed, the late sell-down has opened up compelling value
and/or boosted dividend yield in several names that we continue to favour,
such as Shinhan Financial, Asustek, and PTT Chemical
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