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GEMs Strategy: Re-Setting Our Compass
Reduced Target: After recent market losses, we cut our year-end target for MSCI GEMs to 1,225 from 1,400 (assumes EM
equities at 10.4x forward at end-2011, or 10% discount to long-term average of 11.5x). This still represents 21% upside
from current levels and full year gains of 6.5%. Further gains and multiple expansion may have to wait until 2012.
Macro Reactions to EM weakness: i) EM bond yields down to 4.1%; EYR shows equities v bonds as a ‘three-standard
deviation event’ favoring equities; ii) lack of normal ‘risk-off’ dollar rally; iii) Nearly 500bp of rate hikes to year-end
cancelled; this is bullish for equities and supports our upgrade of Cons. Discretionary to Overweight (See Stock Screens)
Discounting Downgrades: EPS declines of 20-25% from current levels discounted in MSCI GEMs; in 2008-9, EPS fell
42%. Therefore, mild recession is priced in – a repeat of 2008-9 is not. Models: i) Forward P/E at 9x ( v. long-term
average of 11.5x); ii) Trailing P/E at 10.9x (v. average of 15x); This year’s market (-12%) = next year’s earnings (+13%)?
2008 Comps – Too Bearish: EMs fell 20% from 2011 high; in 2007-8, MSCI GEMs fell by 66%. Global GDP growth
forecast for 2011 cut to 3.1% from 3.4% previously; in 2009, Global GDP fell by 1.9%.
Earnings Vulnerability: EPS forecasts of +15.8% (2011), +12.8% (2012) to come down further; however, EPS growth of
4% per annum (or -5 to 10% in 2011) is priced in. EPS forecasts in EM protected by: i) still-premium GDP growth; ii) high
Nominal GDP growth; iii) Commodity relapse aides commodity importers
Asset Allocation:
- Regions – Overweight: Asia; Neutral: CEEMEA; Underweight: Latin America.
- Key Country Calls – Overweight: China, Korea, Turkey (upgraded); Neutral: Indonesia, Thailand, Taiwan, Russia
(Downgraded), Brazil, Peru; Underweight: India, Malaysia, Philippines, Egypt, Hungary, Morocco, Poland, South Africa,
Turkey, Chile, Colombia, Mexico.
- Key Sector Calls – Overweight: Cons. Discretionary (upgraded), Financials, Info Tech., Materials; Neutral: Consumer
Disc. Energy, Industrials; Underweight: Cons Staples, Health Care, Utilities, Telecoms.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GEMs Strategy: Re-Setting Our Compass
Reduced Target: After recent market losses, we cut our year-end target for MSCI GEMs to 1,225 from 1,400 (assumes EM
equities at 10.4x forward at end-2011, or 10% discount to long-term average of 11.5x). This still represents 21% upside
from current levels and full year gains of 6.5%. Further gains and multiple expansion may have to wait until 2012.
Macro Reactions to EM weakness: i) EM bond yields down to 4.1%; EYR shows equities v bonds as a ‘three-standard
deviation event’ favoring equities; ii) lack of normal ‘risk-off’ dollar rally; iii) Nearly 500bp of rate hikes to year-end
cancelled; this is bullish for equities and supports our upgrade of Cons. Discretionary to Overweight (See Stock Screens)
Discounting Downgrades: EPS declines of 20-25% from current levels discounted in MSCI GEMs; in 2008-9, EPS fell
42%. Therefore, mild recession is priced in – a repeat of 2008-9 is not. Models: i) Forward P/E at 9x ( v. long-term
average of 11.5x); ii) Trailing P/E at 10.9x (v. average of 15x); This year’s market (-12%) = next year’s earnings (+13%)?
2008 Comps – Too Bearish: EMs fell 20% from 2011 high; in 2007-8, MSCI GEMs fell by 66%. Global GDP growth
forecast for 2011 cut to 3.1% from 3.4% previously; in 2009, Global GDP fell by 1.9%.
Earnings Vulnerability: EPS forecasts of +15.8% (2011), +12.8% (2012) to come down further; however, EPS growth of
4% per annum (or -5 to 10% in 2011) is priced in. EPS forecasts in EM protected by: i) still-premium GDP growth; ii) high
Nominal GDP growth; iii) Commodity relapse aides commodity importers
Asset Allocation:
- Regions – Overweight: Asia; Neutral: CEEMEA; Underweight: Latin America.
- Key Country Calls – Overweight: China, Korea, Turkey (upgraded); Neutral: Indonesia, Thailand, Taiwan, Russia
(Downgraded), Brazil, Peru; Underweight: India, Malaysia, Philippines, Egypt, Hungary, Morocco, Poland, South Africa,
Turkey, Chile, Colombia, Mexico.
- Key Sector Calls – Overweight: Cons. Discretionary (upgraded), Financials, Info Tech., Materials; Neutral: Consumer
Disc. Energy, Industrials; Underweight: Cons Staples, Health Care, Utilities, Telecoms.
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