Macquarie Research, Global Sector Opportunities - Superior returns in EM Staples

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��



Global Sector Opportunities
Superior returns in EM Staples
Event
 The US dollar futures index is currently around 74 and the currency is likely to
remain weak at least until the Fed starts to talk about raising rates.
Impact
 Historically, emerging market equities tend to outperform the S&P500 when
the US dollar is weak, as you can see from the chart on the left.
 Our global economics team thinks the US dollar will remain weak for a
number of reasons. Most notable among these is the country’s low interest
rates relative to Europe, and a desire to promote growth in the US by driving
down the nominal exchange rate.
 Paul Cavey believes China’s growth will slow as a result of tight monetary
policy, and as America’s 2nd largest trading partner this will also put a drag on
US growth. While the slowdown is expected to be temporary, it will also put
downward pressure on the US dollar in the near term.
 Looking at historical risk/return relationships it is clear emerging markets offer
more capital growth, while US equities are more defensive in comparison.
Most emerging market sectors also offer higher risk-adjusted returns, as
shown by their generally superior sector Sharpe ratios. The highest Sharpe
ratios are seen in the consumer staples, energy, materials and telecom
sectors in emerging markets.
Outlook
 Given the weak outlook for the US dollar, emerging market equities could be
expected to outperform towards the end of the year. Thus, the seasonal
weakness expected in equities over the coming months presents a good
opportunity to accumulate emerging market equities given their superior long
term growth potential and record of superior risk adjusted returns.
 While the macro outlook remains uncertain we recommend to focus buying on
more defensive sectors with higher Sharpe ratios such as consumer staples
and telecommunications. We would also accumulate emerging market
companies that are building global brands.
 Our Asian strategist, Michael Kurtz, currently prefers Korea and Thailand,
which happen to also rank near the top of our Country Alpha Model.
 Two key stock picks in Korea are Hyundai Motor Company (005380 KS,
Won223,000, Outperform) and Samsung Electronics (005930 KS,
Won851,000, Outperform), which are both offering forecast 12 month
shareholder returns over 40% to our target prices.
 A key pick in Thailand, and one that’s also in the high Shape ratio consumer
staples sector, is Big C Supercentre (BIGC TB, Bt88.25, Outperform).