Financials Focus Macro matters - The good and the bad Investing in banks ::Macquarie Research,

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Financials Focus
Macro matters
The good and the bad
Investing in banks has been a macro call this year. Trying to finesse the call on
banks should have ceded to simply lumping countries in either a good or bad
macro basket. By doing so, it would have predicted the greater share price
resiliency of the ASEAN banks and flagged the laggard performance of the North
Asian banks. We think the macro can continue to dictate price performance.
We’ve conveyed our preference within the sector for the ASEAN region led by
Indonesia and Singapore. Though we wavered on retaining this call, we’re
retaining this call, and in fact, add to this preference by upping Thailand and
Philippines to our preferred list upon further contemplation. We continue to be
bearish on Greater China and India on a regional bank basis. We’re Neutral on
Malaysia and Japan, and bring down our enthusiasm on Korea by pulling them
down to this weighting. Our regional preference took into consideration the
relative performance, valuations, fundamental issues, and sentiment on risk.
Going south for the winter
Our preference for banks in Southeast Asia continues for the following reasons:
 No performance anxiety. The favourable macro basket represented by
banks in SE Asia has gone down by 12% YTD, while the basket deemed to
be fraught with a less attractive top-down picture (inclusive of Greater China
and India) has gone down by 31% YTD. We think the macro outlook is
unlikely to change, and the divergence in price performance will continue.
 The price is not always right. The good macro basket is trading on a PER
of 9.2x versus the bad macro basket PER of 7.0x. In our view, defensiveminded
investors find solace with banks operating in a more attractive macro
environment, and have paid and will continue to pay a premium for that higher
degree of perceived safety.
 Don’t worry, be happy. We think a positive macro outlook can continue to
drive price performance for as long as inflation is kept at bay. The recent
depreciation in regional currencies raised concerns that it would exacerbate
price pressures. However, contrary to perception, the currencies in SE Asia
did not fall as sharply as the other currencies. The risk from depreciation is
likely to be greater up North.
 Risk on, risk off. If the risk trade is off, then the higher beta markets in a
falling market should be avoided. Against the MSCI Asia Pacific index, the
higher beta markets are led by Japan, India, and Korea. The banks in
Southeast Asia are at the tail end of the beta ranking.
Regional preference
 Fundamentals and valuations may continue to take a back seat to the macro,
and in this regard, our preferred markets are Indonesia, Singapore, Thailand,
and Philippines. Our least preferred markets remain HK, China, Taiwan, and
India. We’re Neutral on Malaysia, Japan, and Korea. Within our preferred
markets, individual names we like are Mandiri, UOB, KBank, and Metrobank.
Names we don’t like are Dah Sing Financial, First Financial, and SBI.