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UBS Investment Research
Asia Equity Strategy
3 questions: Fed policy shift, China
Consumer and Korea cyclicals
3 frequently asked questions
We answer 3 frequent client questions in the last few weeks in this week’s note.
What sectors under/outperform around the first Fed rate hike?
History suggests yield stocks such as Telco and Utilities, and interest rate-sensitive
stocks such as Property, underperformed. Growth-sensitive sectors such as Energy,
Materials, Autos and Software tended to outperform. In the current cycle, we see
the Singapore Banks as attractive ahead of a Fed policy shift, if it happens in June.
Is it time to buy the China Consumer stocks?
The stocks have underperformed MSCI China by more than 10% since Nov, on the
back of: 1) high relative valuations, 2) margin concerns due to higher commodity
cost and government pressure against price increases; and 3) deteriorating earnings
momentum, partly as a result of 2). Whilst we think inflation is likely to ease
cyclically, and therefore margin pressure may not worsen, valuation continues to
look expensive. We prefer buying the banks to play moderating inflation in China.
How far can the Korean cyclicals keep running?
Clients have asked when stocks such as Autos and Petrochemicals could start to
underperform, given they have run up with strong earnings momentum, but look
expensive on PB and have high profit margins. Our analysis suggests that they tend
to underperform when earnings upgrades stop. As we highlighted on 4 April, we
think the risk is rising with the Yen depreciating against the Won.
In this week’s note, we look at three of the most frequently asked questions from
our clients during our meetings over the last two weeks. They are: 1) Which
sectors outperform around the first Fed rate hike? 2) Is it time to buy the China
Consumer stocks? And 3) How far can the Korean cyclicals keep running?
1. Which sectors under/outperform around the first Fed
rate hike?
We highlighted our views on QE and its impact on Asian equities in our note
(‘End of QE? What it means for Asia Equities’ dated 30th March 2011) – if the
Fed keeps its balance sheet intact, we see this as having very little impact on
Asian equities, if Fed cuts its balance sheet and this leads up to a spike up in
LIBOR as last year, we think that could be more of a challenge; the uncertainty
however is likely to remain the biggest headwind for equities for the next few
months. Several clients have asked us about the relative performance of sectors
in Asia after the first tightening of monetary policy by the Fed historically.
Since 1994, we also have data for the Fed fund
futures and have calculated returns from the point they started rising before the
actual rate hike, on the basis that equity markets probably anticipated the policy
hike ahead of the actual rate increase in line with what the futures market was
suggesting.
The data suggests that Utilities and Telecom stocks in Asia tend to underperform
the market after the first Fed rate hike or in the anticipation of one. This is
potentially because of the impact of the Fed rates on Treasury bond yields.
Except 1986 and 2004, when the ten year treasury yields fell over the next one
month, the first fed rate hike has typically caused long-dated yields to rise,
which is generally bad for Utilities, and also to some extent for Telecoms.
The other sector that seems to get hurt is Financials, particularly Property. This
is not surprising given the direct impact of interest rates on these stocks.
Energy, Materials and Autos, on the other hand, have outperformed during such
periods historically, in general. Software has also performed well although a
shorter history is available for the sector.
We find this historical evidence as a useful guide to sector positioning but are
not too dogmatic about its application. This is because there have been a few
times when sector returns have deviated significantly from historical trends. For
instance, when the Fed raised rates in 2004, being underweight Property, which
had underperformed the market in all first-rate-hike episodes until then, or
Utilities, which had also underperformed in most episodes, would have proved
to be a bad choice.
As an aside, in the event that the Fed does cut its balance sheet and the
LIBOR/SIBOR rises, we see Singapore banks as the best fundamental
beneficiary in the region (for details please refer to ‘End of QE? What it means
for Asia Equities’ dated 30th March 2011). DBS in Jaj Singh’s view (our
Singapore banks analyst), is the most geared to rising interest rates in Singapore.
OCBC is his high conviction buy and also on our key call list. Singapore banks
have underperformed the region this year by 5%, are trading at 1.44x price to
book which is 11% discount to its long term average, and look very attractive in
our view, especially relative to Hong Kong banks.
2. Is it time to buy the China Consumer stocks?
We have been bullish on the Chinese banks. They are amongst the cheapest
stocks in the region, and as we expect inflation to come down cyclically their
biggest overhang – fears over an acceleration in government tightening and an
economic hard landing – is likely to ease (Four Macro Ideas – Asia ex Japan, 4
April 2011). As a corollary of this, a number of investors have asked us: should
we buy the China Consumer stocks if the inflation and hard landing fears
subside?
The China Consumer stocks have underperformed both MSCI Asia ex Japan and
MSCI China by more than 10 percentage points since last November. We think
a number of factors caused this. First, the sector was getting very expensive: its
PB valuation relative to MSCI China was at its high since 2004 (Chart 2).
Second, investors became increasingly concerned about their profit margins due
to rising commodity cost and government pressure against end product price
increases in its effort to dampen inflation. Finally, earnings momentum has
deteriorated: relative to MSCI China, it has turned sharply negative for
Consumer Discretionary after November. For Consumer Staples stocks,
earnings momentum has also started to soften this year
Are these factors changing? Valuations have come off, but they are still near
their highs. The valuation case alone is not compelling.
Prices for some key agricultural commodities have eased from their peaks in
recent weeks, notably rice and cotton. That is the biggest reason why we are
confident that headline inflation will ease in the coming months. On the other
hand, given that controlling inflation continues to be a priority, it is difficult to
envision that the government will roll back its effort to dissuade companies from
raising prices in the near-term, even if there may not be impetus to further
tighten. In sum, from a top-down perspective, we think it would be premature to
assume that margin pressure will ease over the next few months.
The good news is the margin pressure is getting reflected in analyst forecasts:
compared with 3 months ago, the aggregate 2011e EBIT margin for China
Consumer stocks is down by about 60 basis points. Sequentially, this represents
a 120 basis points decline from 2010. This brings the sector margin back to its
2009 level, although that still represents the highest level in 2003-09
On the growth front, consensus is forecasting 16%/28% year-on-year revenue
increases for Consumer Discretionary/Staples in 2011, compared with 31%/25%
in 2010. The average over the past decade has been 28%/24%. The downward
margin revision over the last 3 months was what drove the deterioration in
earnings momentum that we showed in Chart 3. Given that the consensus
forecast revenue growth does not look particularly low, an improvement in the
relative earnings momentum would likely need to be driven by higher forecast
margin or earnings deterioration for the broader China market ex-Consumer.
The former of these would seem unlikely to us and the latter is likely to be a
headwind against absolute performance in the sector.
In sum, we don’t think it is time to buy the China Consumer stocks – valuation
remains high, margin pressure is likely to persist (though it may not deteriorate
further) and the relative earnings momentum seems unlikely to pick up
significantly. There could be opportunities for individual stocks: our sector
analyst Erica Poon Werkun prefers Ports Design, China Mengniu, Shirble
Department Store and her least preferred stocks are China Huiyuan Juice and
China Foods.
As a macro trade to play moderating inflation pressure in China, we continue to
think investors should buy the Chinese banks, even though they have run up 9%
year-to-date. The forecast earnings growth is strong at 18% versus 15% for the
China market as a whole. Whilst the sceptics would point to earnings risk from
tightening and potentially NPLs, we would argue that earnings in China as a
whole would be vulnerable if bank earnings were to deteriorate sharply, and the
risk are better reflected in the valuations of the banks versus other sectors
(notably Consumer). Even after the run-up, the banks continue to trade at a 12%
PB discount to the China market and a 23% discount on forward PE. Chart 5 and
6 below show the relative valuation of banks versus the Consumer sectors in
particular, and why we continue to favour the former.
3. How far can the Korean cyclicals keep running?
Despite a slowdown in the leading indicators, Korean cyclicals have continued
outperform and a number of stocks have now exceeded their historically high
valuation on price to book multiples. What would trigger a reversal in
performance?
To set the context, the outperformance in the past month has been driven by the
non-tech stocks. Back in January, we outlined our shift in preference from
exporters to domestic stocks in the region as the leading economic indicators in
the developed world were peaking. That view has worked well for Tech and
Taiwan: as Chart 7 shows, they have underperformed since February.
However, whilst Korea has historically been correlated with Taiwan, their
performance has diverged after mid-March. This is primarily the result of the
tragic events in Japan. Many stocks in Korea are perceived as beneficiaries of
capacity destruction and supply disruption in Japan, notably in Autos,
Petrochemical/Refining and at least initially, Steel (although our regional steel
analysts hold the opposite view). The shipbuilders have also done well
indirectly in anticipation of more activity in the LNG space, but most
importantly due to positive news flow on new orders that are unrelated to Japan.
These stocks have largely driven the outperformance of Korea, and its
divergence from Taiwan and Tech sector.
A number of these cyclical stocks are now trading at relatively expensive priceto-
book multiples compared with history, though their PEs are not high due to
strong earnings momentum. This applies particularly well to the Autos and the
Petrochemical stocks, which are reporting high margins (see Charts 8-10).
Young Chang, our Autos analyst, has had high conviction Buys on the Autos
stocks due to fundamental improvements in their product quality and brands,
and continues to be confident about their earnings prospect. John Chung, our
regional Petrochemical analyst, is also bullish on the sector, as he thinks supply
& demand balance could improve and this could lead to higher refining margins.
The question we received from investors is: when does asset/capacity based
valuation start to matter, and what are the triggers that could lead to
underperformance?
We have looked back on a quantitative basis for cyclical stocks that 1) had
outperformed, 2) had high margins; 3) looked expensive on price to book
relative to history; and 4) yet looked inexpensive on PE, due to rising earnings.
We deliberately did not look at performance during the ‘bubble’ period in late
2007 when the market was arguably distorted by liquidity. The precedents we
found were some of the Korea cyclical stocks during 2006 and the Taiwan
airlines during 2010.
What appears to be the key driver for a reversal in performance is earnings
momentum. As we show in Charts 11-16, the stocks kept running as long as the
earnings kept getting revised up. Once there are signs that the upgrades will stop,
investors started to sell. In some cases, the shares may anticipate the earnings
downgrade and start falling ahead of that, but the pattern looks pretty clear:
earnings represent the key trigger for underperformance.
As we highlighted on 4th April (Four Macro Ideas: Asia ex Japan), we think
earnings risk is rising for the Korean exporters with the Yen depreciating against
the Won. Duncan Wooldridge, our economist, is calling for a stronger Korean
Won in 2011 as a tool for the government to dampen inflation pressure (Korea:
Hooked on the Korean Won, 13 April 2011). In the near-term, the supply
disruption in Japan could well push earnings higher for the Korean competitors,
which in turn could support the share prices. However, the exchange rate is a
key structural driver in the relative competitiveness of the Korea versus Japan
exporters, and investors should be vigilant of any signs of earnings weakness.
The Steel sector could be the proverbial ‘canary in the coal mine’, as our
analysts Yong Suk Son and Atsushi Yamaguchi believe that capacity destruction
in Japan has been relatively limited, and now the steel mills could be exporting
their products at 7% lower exchange rate versus the Won than just a month ago.
We continue to favour Japan exporters over their Korean competitors as we
believe the Yen will further weaken.
Summary of our Strategy View
We remain positive on Asia ex-Japan equities in 2011. Earnings growth
forecasts look achievable and valuations look attractive, especially relative to
other assets. With liquidity now becoming a tailwind, growth less of a concern
and the domestic credit cycle set to improve, we think Asia could re-rate from
its current discount to its historical average PE, and potentially even a premium.
Our 2011 year-end MSCI Asia ex-Japan index target is 670, based on 13.7x
forward PE, in line with the long-term average.
The combination of what we expect to be peaking leading indicators in the
coming months allied with reasonably firm relative valuations leaves little left in
the tank in our view for what was essentially a ‘macro’ trade that started last
November: the ‘exporter trade’ looks to be largely behind us. Our key country
picks are Singapore, China and Thailand - we have few macro fears here,
earnings and valuations look attractive, and weakness due largely to foreign
selling looks unwarranted relative to macro issues. We cut Korea and Taiwan to
underweight - cyclicals in general and Taiwan and Korea have tended to
struggle in relative terms after leading indicators peaked - whilst the absolute
valuations are not yet ‘expensive’, relative to the rest of Asia the PB is back to
near peak levels since 2003. We raise Indonesia to Neutral - bond yields have
moved higher with inflation fears.
At the sector level, we are overweight financials, as the best proxy for the
liquidity theme and the credit cycle. We are underweight defensive sectors,
expecting them to underperform a rising market. We believe there is an elevated
risk that Asian markets could reach a ‘euphoric’ state, fuelled by inappropriately
loose monetary policy. On the downside, inflation, sharply higher US bond
yields and government intervention are risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Equity Strategy
3 questions: Fed policy shift, China
Consumer and Korea cyclicals
3 frequently asked questions
We answer 3 frequent client questions in the last few weeks in this week’s note.
What sectors under/outperform around the first Fed rate hike?
History suggests yield stocks such as Telco and Utilities, and interest rate-sensitive
stocks such as Property, underperformed. Growth-sensitive sectors such as Energy,
Materials, Autos and Software tended to outperform. In the current cycle, we see
the Singapore Banks as attractive ahead of a Fed policy shift, if it happens in June.
Is it time to buy the China Consumer stocks?
The stocks have underperformed MSCI China by more than 10% since Nov, on the
back of: 1) high relative valuations, 2) margin concerns due to higher commodity
cost and government pressure against price increases; and 3) deteriorating earnings
momentum, partly as a result of 2). Whilst we think inflation is likely to ease
cyclically, and therefore margin pressure may not worsen, valuation continues to
look expensive. We prefer buying the banks to play moderating inflation in China.
How far can the Korean cyclicals keep running?
Clients have asked when stocks such as Autos and Petrochemicals could start to
underperform, given they have run up with strong earnings momentum, but look
expensive on PB and have high profit margins. Our analysis suggests that they tend
to underperform when earnings upgrades stop. As we highlighted on 4 April, we
think the risk is rising with the Yen depreciating against the Won.
In this week’s note, we look at three of the most frequently asked questions from
our clients during our meetings over the last two weeks. They are: 1) Which
sectors outperform around the first Fed rate hike? 2) Is it time to buy the China
Consumer stocks? And 3) How far can the Korean cyclicals keep running?
1. Which sectors under/outperform around the first Fed
rate hike?
We highlighted our views on QE and its impact on Asian equities in our note
(‘End of QE? What it means for Asia Equities’ dated 30th March 2011) – if the
Fed keeps its balance sheet intact, we see this as having very little impact on
Asian equities, if Fed cuts its balance sheet and this leads up to a spike up in
LIBOR as last year, we think that could be more of a challenge; the uncertainty
however is likely to remain the biggest headwind for equities for the next few
months. Several clients have asked us about the relative performance of sectors
in Asia after the first tightening of monetary policy by the Fed historically.
Since 1994, we also have data for the Fed fund
futures and have calculated returns from the point they started rising before the
actual rate hike, on the basis that equity markets probably anticipated the policy
hike ahead of the actual rate increase in line with what the futures market was
suggesting.
The data suggests that Utilities and Telecom stocks in Asia tend to underperform
the market after the first Fed rate hike or in the anticipation of one. This is
potentially because of the impact of the Fed rates on Treasury bond yields.
Except 1986 and 2004, when the ten year treasury yields fell over the next one
month, the first fed rate hike has typically caused long-dated yields to rise,
which is generally bad for Utilities, and also to some extent for Telecoms.
The other sector that seems to get hurt is Financials, particularly Property. This
is not surprising given the direct impact of interest rates on these stocks.
Energy, Materials and Autos, on the other hand, have outperformed during such
periods historically, in general. Software has also performed well although a
shorter history is available for the sector.
We find this historical evidence as a useful guide to sector positioning but are
not too dogmatic about its application. This is because there have been a few
times when sector returns have deviated significantly from historical trends. For
instance, when the Fed raised rates in 2004, being underweight Property, which
had underperformed the market in all first-rate-hike episodes until then, or
Utilities, which had also underperformed in most episodes, would have proved
to be a bad choice.
As an aside, in the event that the Fed does cut its balance sheet and the
LIBOR/SIBOR rises, we see Singapore banks as the best fundamental
beneficiary in the region (for details please refer to ‘End of QE? What it means
for Asia Equities’ dated 30th March 2011). DBS in Jaj Singh’s view (our
Singapore banks analyst), is the most geared to rising interest rates in Singapore.
OCBC is his high conviction buy and also on our key call list. Singapore banks
have underperformed the region this year by 5%, are trading at 1.44x price to
book which is 11% discount to its long term average, and look very attractive in
our view, especially relative to Hong Kong banks.
2. Is it time to buy the China Consumer stocks?
We have been bullish on the Chinese banks. They are amongst the cheapest
stocks in the region, and as we expect inflation to come down cyclically their
biggest overhang – fears over an acceleration in government tightening and an
economic hard landing – is likely to ease (Four Macro Ideas – Asia ex Japan, 4
April 2011). As a corollary of this, a number of investors have asked us: should
we buy the China Consumer stocks if the inflation and hard landing fears
subside?
The China Consumer stocks have underperformed both MSCI Asia ex Japan and
MSCI China by more than 10 percentage points since last November. We think
a number of factors caused this. First, the sector was getting very expensive: its
PB valuation relative to MSCI China was at its high since 2004 (Chart 2).
Second, investors became increasingly concerned about their profit margins due
to rising commodity cost and government pressure against end product price
increases in its effort to dampen inflation. Finally, earnings momentum has
deteriorated: relative to MSCI China, it has turned sharply negative for
Consumer Discretionary after November. For Consumer Staples stocks,
earnings momentum has also started to soften this year
Are these factors changing? Valuations have come off, but they are still near
their highs. The valuation case alone is not compelling.
Prices for some key agricultural commodities have eased from their peaks in
recent weeks, notably rice and cotton. That is the biggest reason why we are
confident that headline inflation will ease in the coming months. On the other
hand, given that controlling inflation continues to be a priority, it is difficult to
envision that the government will roll back its effort to dissuade companies from
raising prices in the near-term, even if there may not be impetus to further
tighten. In sum, from a top-down perspective, we think it would be premature to
assume that margin pressure will ease over the next few months.
The good news is the margin pressure is getting reflected in analyst forecasts:
compared with 3 months ago, the aggregate 2011e EBIT margin for China
Consumer stocks is down by about 60 basis points. Sequentially, this represents
a 120 basis points decline from 2010. This brings the sector margin back to its
2009 level, although that still represents the highest level in 2003-09
On the growth front, consensus is forecasting 16%/28% year-on-year revenue
increases for Consumer Discretionary/Staples in 2011, compared with 31%/25%
in 2010. The average over the past decade has been 28%/24%. The downward
margin revision over the last 3 months was what drove the deterioration in
earnings momentum that we showed in Chart 3. Given that the consensus
forecast revenue growth does not look particularly low, an improvement in the
relative earnings momentum would likely need to be driven by higher forecast
margin or earnings deterioration for the broader China market ex-Consumer.
The former of these would seem unlikely to us and the latter is likely to be a
headwind against absolute performance in the sector.
In sum, we don’t think it is time to buy the China Consumer stocks – valuation
remains high, margin pressure is likely to persist (though it may not deteriorate
further) and the relative earnings momentum seems unlikely to pick up
significantly. There could be opportunities for individual stocks: our sector
analyst Erica Poon Werkun prefers Ports Design, China Mengniu, Shirble
Department Store and her least preferred stocks are China Huiyuan Juice and
China Foods.
As a macro trade to play moderating inflation pressure in China, we continue to
think investors should buy the Chinese banks, even though they have run up 9%
year-to-date. The forecast earnings growth is strong at 18% versus 15% for the
China market as a whole. Whilst the sceptics would point to earnings risk from
tightening and potentially NPLs, we would argue that earnings in China as a
whole would be vulnerable if bank earnings were to deteriorate sharply, and the
risk are better reflected in the valuations of the banks versus other sectors
(notably Consumer). Even after the run-up, the banks continue to trade at a 12%
PB discount to the China market and a 23% discount on forward PE. Chart 5 and
6 below show the relative valuation of banks versus the Consumer sectors in
particular, and why we continue to favour the former.
3. How far can the Korean cyclicals keep running?
Despite a slowdown in the leading indicators, Korean cyclicals have continued
outperform and a number of stocks have now exceeded their historically high
valuation on price to book multiples. What would trigger a reversal in
performance?
To set the context, the outperformance in the past month has been driven by the
non-tech stocks. Back in January, we outlined our shift in preference from
exporters to domestic stocks in the region as the leading economic indicators in
the developed world were peaking. That view has worked well for Tech and
Taiwan: as Chart 7 shows, they have underperformed since February.
However, whilst Korea has historically been correlated with Taiwan, their
performance has diverged after mid-March. This is primarily the result of the
tragic events in Japan. Many stocks in Korea are perceived as beneficiaries of
capacity destruction and supply disruption in Japan, notably in Autos,
Petrochemical/Refining and at least initially, Steel (although our regional steel
analysts hold the opposite view). The shipbuilders have also done well
indirectly in anticipation of more activity in the LNG space, but most
importantly due to positive news flow on new orders that are unrelated to Japan.
These stocks have largely driven the outperformance of Korea, and its
divergence from Taiwan and Tech sector.
A number of these cyclical stocks are now trading at relatively expensive priceto-
book multiples compared with history, though their PEs are not high due to
strong earnings momentum. This applies particularly well to the Autos and the
Petrochemical stocks, which are reporting high margins (see Charts 8-10).
Young Chang, our Autos analyst, has had high conviction Buys on the Autos
stocks due to fundamental improvements in their product quality and brands,
and continues to be confident about their earnings prospect. John Chung, our
regional Petrochemical analyst, is also bullish on the sector, as he thinks supply
& demand balance could improve and this could lead to higher refining margins.
The question we received from investors is: when does asset/capacity based
valuation start to matter, and what are the triggers that could lead to
underperformance?
We have looked back on a quantitative basis for cyclical stocks that 1) had
outperformed, 2) had high margins; 3) looked expensive on price to book
relative to history; and 4) yet looked inexpensive on PE, due to rising earnings.
We deliberately did not look at performance during the ‘bubble’ period in late
2007 when the market was arguably distorted by liquidity. The precedents we
found were some of the Korea cyclical stocks during 2006 and the Taiwan
airlines during 2010.
What appears to be the key driver for a reversal in performance is earnings
momentum. As we show in Charts 11-16, the stocks kept running as long as the
earnings kept getting revised up. Once there are signs that the upgrades will stop,
investors started to sell. In some cases, the shares may anticipate the earnings
downgrade and start falling ahead of that, but the pattern looks pretty clear:
earnings represent the key trigger for underperformance.
As we highlighted on 4th April (Four Macro Ideas: Asia ex Japan), we think
earnings risk is rising for the Korean exporters with the Yen depreciating against
the Won. Duncan Wooldridge, our economist, is calling for a stronger Korean
Won in 2011 as a tool for the government to dampen inflation pressure (Korea:
Hooked on the Korean Won, 13 April 2011). In the near-term, the supply
disruption in Japan could well push earnings higher for the Korean competitors,
which in turn could support the share prices. However, the exchange rate is a
key structural driver in the relative competitiveness of the Korea versus Japan
exporters, and investors should be vigilant of any signs of earnings weakness.
The Steel sector could be the proverbial ‘canary in the coal mine’, as our
analysts Yong Suk Son and Atsushi Yamaguchi believe that capacity destruction
in Japan has been relatively limited, and now the steel mills could be exporting
their products at 7% lower exchange rate versus the Won than just a month ago.
We continue to favour Japan exporters over their Korean competitors as we
believe the Yen will further weaken.
Summary of our Strategy View
We remain positive on Asia ex-Japan equities in 2011. Earnings growth
forecasts look achievable and valuations look attractive, especially relative to
other assets. With liquidity now becoming a tailwind, growth less of a concern
and the domestic credit cycle set to improve, we think Asia could re-rate from
its current discount to its historical average PE, and potentially even a premium.
Our 2011 year-end MSCI Asia ex-Japan index target is 670, based on 13.7x
forward PE, in line with the long-term average.
The combination of what we expect to be peaking leading indicators in the
coming months allied with reasonably firm relative valuations leaves little left in
the tank in our view for what was essentially a ‘macro’ trade that started last
November: the ‘exporter trade’ looks to be largely behind us. Our key country
picks are Singapore, China and Thailand - we have few macro fears here,
earnings and valuations look attractive, and weakness due largely to foreign
selling looks unwarranted relative to macro issues. We cut Korea and Taiwan to
underweight - cyclicals in general and Taiwan and Korea have tended to
struggle in relative terms after leading indicators peaked - whilst the absolute
valuations are not yet ‘expensive’, relative to the rest of Asia the PB is back to
near peak levels since 2003. We raise Indonesia to Neutral - bond yields have
moved higher with inflation fears.
At the sector level, we are overweight financials, as the best proxy for the
liquidity theme and the credit cycle. We are underweight defensive sectors,
expecting them to underperform a rising market. We believe there is an elevated
risk that Asian markets could reach a ‘euphoric’ state, fuelled by inappropriately
loose monetary policy. On the downside, inflation, sharply higher US bond
yields and government intervention are risks.
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