Director’s Cut - Sovereign buying signals opportunity: Macquarie Research,

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Director’s Cut
Sovereign buying signals opportunity
News China’s sovereign wealth fund is buying the shares of the four major state
owned banks could be an important positive catalyst for the sector.
Going into the news investors were underweight China banks on concerns over
the property market, the level of provisioning, the quality of financial reporting
and general worries over global growth. That said, these issues are well known,
and given the fall in the sector, it’s fair to say these negatives were largely
discounted already. Now the sovereign fund has reduced the risk for investors,
as it effectively puts a floor under share prices not far from current levels.
With this potential floor, the expected risk-reward proposition for China’s largest
banks looks more attractive. This is because our China banks analyst Victor
Wang estimates the average 12 month TSR for the big 4 banks is over 100%.
The big 4 are also trading on forward PERs of 5x and just under book.
Among the big 4, Victor favours ICBC (1398 HK) as he has a positive view on
the bank’s strategy to improve returns on risk weighted assets, its leading IT
system and network, and management quality. While reports indicate the
sovereign fund is only buying the big 4, a sustained sector trend should also be
positive for China Minsheng (1988 HK), which has a forecast 12 month TSR in
excess of 140%, and is currently selling for 65% of forward book value.
Following on from yesterday’s theme that equities were overdue for a rally,
Burke Lau has looked at what strategies worked in Asia’s post crisis rallies. He
found that valuation works best, and that most signals, particularly momentum,
underperform or are only weakly predictive.


Highlights
 Based on the September car sales numbers for Western Europe, Jens
Schattner would buy BMW (BMW GR) and sell Fiat (F IM).
 With China’s Golden Week retail sales up 17.5% Linda Huang remains a
buyer of Golden Eagle (3308 HK) and Belle (1880 HK).
 Tom White has looked at Priceline’s (PCLN US) European exposure and
remains positive given the secular shift to online hotel bookings.