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India Equity Research Reports, IPO and Stock News
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Our 2Q outlook in a nutshell
In this 2Q strategy outlook, we refresh our views on potential returns, allocations and
implementation ideas, drawing in particular on our recent work on earnings and valuation
(see “Corporate Asia” Earnings: from Macro to Micro, March 6, 2012; and AsiaPac
Valuation: What works, and when, March 12, 2012).
The bottom line:
2Q outlook: More data-dependent; some consolidation likely; rotation from
global cyclicals to domestic themes. Asian equities rallied 14% in 1Q as markets
priced out EU financial risk and priced in a better US growth outlook. With
valuations and positioning having recovered, macro data and policy newsflow are
likely to be key drivers for markets in the near term. Coming off a high base, it may
be difficult for the US to continue to surprise positively, which suggests the sharp
outperformance of global cyclicals could reverse, in our view. In contrast, concerns
over China’s growth and policy outlook have intensified, so the potential for
positive surprises is greater. The intersection of potential surprises and market
expectations therefore suggests an emphasis on domestic themes vs. global
cyclicals as well as some ‘digestion’ of recent gains. We reflect this in our roughly
flat (+2%) 3m return expectation.
12-month outlook: Moderately higher targets. Although we see little upside in
the near term, we remain strategically positive on Asia, and see upside to
consensus 2013 earnings estimates as well as potential valuation re-rating later
this year. Accordingly, we raise our 12-month MXAPJ index target to 525. This
equates to roughly 12x our 2013 index EPS forecast of $44. Our new index target
is 7% above our previous 490 forecast, and implies 19% upside from current levels.
For context, 525 is only slightly above the 2010 intrayear high of 509 and still 11%
below the November 2007 peak of 588.
Market allocations: Restack driven by shifting risk/reward. We retain our
overweight stance on China, but expect a bumpy period in the near term until
clearer signs of policy easing emerge. We raise Indonesia to overweight and India
to market weight, reflecting our preference for domestic themes. We upgrade
Australia to market weight, where we believe near-term cyclical headwinds have
been discounted. In all three cases, we expect the cyclical outlook to improve later
in the year and note that current valuations are fair-to-attractive relative to the
macro environment we expect. We recently downgraded Hong Kong to
underweight following strong price performance because of full valuation and lack
of clear macro or sector catalysts to propel further gains. We remain underweight
Malaysia because we find better opportunities elsewhere in ASEAN and stay
market weight Japan on a 12m view but envision outperformance nearer term.
Sector allocations: Selectively cyclical. Our sector views are generally progrowth,
but tilt more towards domestic themes as opposed to global cyclicals. We
stay overweight energy and banks, and we raise consumer retail & services and
telecom services to overweight, which reflects both our top-down view that the
market may shift away from global themes as well as bottom-up views on large
caps like China Mobile. The high yield and defensive characteristics that telecoms
offer are attractive given likely near-term market consolidation. We remain
underweight consumer staples, property and utilities, and downgrade
transportation and autos.
Implementation ideas: With intraregional stock correlations falling and potential
for some consolidation after strong 1Q performance, we emphasize relative-value
trades. Examples include attractive ASEAN names vs. expensive global cyclicals,
banks vs property, and tech hardware vs semiconductors. We also refresh our list
of top stock ideas.
Fundamentally driven positive strategy view: After nine months of steady
downgrades to consensus earnings forecasts, the revision cycle is stabilizing and
we expect a moderate upgrade phase may commence in 2H12. Our top-down
MXAPJ index ‘per share’ forecasts are in line with consensus at $38 for 2012, but
we are moderately ahead of consensus at $44 for 2013 vs. $42 for bottom-up street
estimates. With (local currency) EPS growth picking up to 15% in 2013 from 9%
this year, we believe current valuations have potential to expand further from
levels that are still inexpensive even after strong 1Q performance. Our top-down
valuation models all point to about 8-10% valuation upside from current levels
(11.4x forward earnings, 1.5x trailing book) in the context of the macro
environment we envision.
Risks: Oil, politics, policy, inflation. High oil prices remain a concern, particularly
the threat that they could rise further if Iran-centered tensions escalate. The 2Q
political calendar includes presidential elections in France, where a victory by
Socialist candidate Francois Hollande could revive concerns over the Euro area
debt and growth outlook. Policy decisions in both the US (QE3 initiatives may be
announced by the FOMC in 2Q) and China (monetary and/or fiscal
accommodation) will be important market influences in the upcoming quarter.
Looking into 2H12, better global growth and sustained high oil prices could mean
that the decline in inflation in many Asian economies reverses and policy tightens
more than markets presently expect.
Implementation: Focus on relative value trades
We emphasize relative trade ideas given falling intra-regional stock correlations and a
potential period of consolidation. Ideas include inexpensive ASEAN names vs.
expensive cyclicals, banks vs. property, and tech hardware vs. semiconductors. We
also feature updated stock picks and derivative ideas for Australia.
“Inexpensive ASEAN” and “Expensive Cyclicals”
The sharp rally in equity prices during December and January was led, as is often the case,
by cyclical sectors, particularly the “Global Cyclicals”. We expect consolidation and
rotation over the near term, perhaps out of the expensive parts of the cyclical complex that
have rallied and into more attractively-valued companies. As we have noted, correlations
are coming down across the equity space, particularly in ASEAN, and we believe that the
liquid, relatively inexpensive stocks in South East Asia are likely to outperform on a tactical
basis.
Accordingly, we have identified two separate lists of stocks: the first we call “expensive
cyclicals”, which is composed of stocks that have outperformed the market considerably
this year and currently appear near or above their 5-year average valuations. In this
analysis, we consider P/E, P/B, dividend yield, and EV/EBITDA, which we have found to be
relevant metrics when utilizing 5-year z-scores (see AsiaPac Valuation: What works, and
when, March 12, 2012). This group of stocks has returned 36% year-to-date, and for
investors seeking short ideas in a market that has run up relatively quickly, we would offer
the names below, which are large and liquid ($1 billion cap & ADTV of $10 million per day).
On the other side, we highlight select stocks in ASEAN, which have generally
underperformed year-to-date and currently trade below their 5-year average valuations.
The ASEAN markets have traded generally defensively, outperforming during periods of
regional equity pullbacks or “choppiness” (for example, the past month or so). We note
that correlations within ASEAN have broken down, and we adopt varying market stances
within the sub-region. On the whole, however, we believe the “inexpensive ASEAN” stocks
are likely to outperform over the near term as we see little near-term upside to Asian
equities.
Taiwan hardware vs. semiconductors
We believe the investment case of favoring hardware over semiconductors is positive
because of:
Relative performance: Upstream semiconductor-related stocks in Taiwan have
outperformed computer component makers and OEMs meaningfully since the
beginning of last year.
Valuation differentials: Hardware is trading at 15% and 32% valuation discounts
to semiconductors in P/E and P/B terms, some of the deepest discounts in their
respective histories.
Earnings momentum: After a 59% earnings downgrade in 2011, forward earnings
expectations for hardware, particularly non-handset-related, seem to be gaining
momentum.
New products: According to our tech research team, a number of new products
will emerge and mature further in 2012 (see Asia Pacific: Technology: Experiencing
dramatic changes from the inside out, September 28, 2011). Arguably, the entire
tech supply chain will benefit from product proliferation/expansion, but we believe
PC component makers and ODMs/OEMs will benefit more than semiconductors
given the former’s higher operating leverage and lower earnings base.
Relative-value trades in Hong Kong
We see select stocks offering attractive relative trade opportunities for both long-only and
absolute-return investors:
i. AIA vs. Chinese insurers: As per AIA’s 4QFY11 results, it achieved strong growth
in China and some parts of ASEAN, reflecting its strong exposure to domestic
demand in Asia. In addition, AIA managed to outgrow major Chinese insurers in
China last year (50% growth in new value of business for AIA vs. 5% for Chinese
insurers based on our analyst’s estimates), yet is still trading at lower valuations
(12E P/EV at 1.5x versus 1.65x for Chinese H-share insurers). We believe a longterm
relative trade of AIA against major Chinese insurers (e.g. China Life and
PingAn) looks sensible.
ii. Wharf vs. Swire: In general, we prefer exposure to retail (31% of Wharf’s NAV)
over office (35% of Swire’s NAV) in HK as our property team expects a 10% decline
in retail rent in 2012 and flat rates in 2013, versus its assumption of a 10% (central)
to 15% (decentralized areas) decline in office rent in 2012, followed by another 5%
decline in 2013. On valuations, Wharf is trading at 42% discount to NAV, which is
still around 1 s.d. below mean, versus a 10.6% NAV discount for Swire, which is at
the top end of the historical ranges
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Our 2Q outlook in a nutshell
In this 2Q strategy outlook, we refresh our views on potential returns, allocations and
implementation ideas, drawing in particular on our recent work on earnings and valuation
(see “Corporate Asia” Earnings: from Macro to Micro, March 6, 2012; and AsiaPac
Valuation: What works, and when, March 12, 2012).
The bottom line:
2Q outlook: More data-dependent; some consolidation likely; rotation from
global cyclicals to domestic themes. Asian equities rallied 14% in 1Q as markets
priced out EU financial risk and priced in a better US growth outlook. With
valuations and positioning having recovered, macro data and policy newsflow are
likely to be key drivers for markets in the near term. Coming off a high base, it may
be difficult for the US to continue to surprise positively, which suggests the sharp
outperformance of global cyclicals could reverse, in our view. In contrast, concerns
over China’s growth and policy outlook have intensified, so the potential for
positive surprises is greater. The intersection of potential surprises and market
expectations therefore suggests an emphasis on domestic themes vs. global
cyclicals as well as some ‘digestion’ of recent gains. We reflect this in our roughly
flat (+2%) 3m return expectation.
12-month outlook: Moderately higher targets. Although we see little upside in
the near term, we remain strategically positive on Asia, and see upside to
consensus 2013 earnings estimates as well as potential valuation re-rating later
this year. Accordingly, we raise our 12-month MXAPJ index target to 525. This
equates to roughly 12x our 2013 index EPS forecast of $44. Our new index target
is 7% above our previous 490 forecast, and implies 19% upside from current levels.
For context, 525 is only slightly above the 2010 intrayear high of 509 and still 11%
below the November 2007 peak of 588.
Market allocations: Restack driven by shifting risk/reward. We retain our
overweight stance on China, but expect a bumpy period in the near term until
clearer signs of policy easing emerge. We raise Indonesia to overweight and India
to market weight, reflecting our preference for domestic themes. We upgrade
Australia to market weight, where we believe near-term cyclical headwinds have
been discounted. In all three cases, we expect the cyclical outlook to improve later
in the year and note that current valuations are fair-to-attractive relative to the
macro environment we expect. We recently downgraded Hong Kong to
underweight following strong price performance because of full valuation and lack
of clear macro or sector catalysts to propel further gains. We remain underweight
Malaysia because we find better opportunities elsewhere in ASEAN and stay
market weight Japan on a 12m view but envision outperformance nearer term.
Sector allocations: Selectively cyclical. Our sector views are generally progrowth,
but tilt more towards domestic themes as opposed to global cyclicals. We
stay overweight energy and banks, and we raise consumer retail & services and
telecom services to overweight, which reflects both our top-down view that the
market may shift away from global themes as well as bottom-up views on large
caps like China Mobile. The high yield and defensive characteristics that telecoms
offer are attractive given likely near-term market consolidation. We remain
underweight consumer staples, property and utilities, and downgrade
transportation and autos.
Implementation ideas: With intraregional stock correlations falling and potential
for some consolidation after strong 1Q performance, we emphasize relative-value
trades. Examples include attractive ASEAN names vs. expensive global cyclicals,
banks vs property, and tech hardware vs semiconductors. We also refresh our list
of top stock ideas.
Fundamentally driven positive strategy view: After nine months of steady
downgrades to consensus earnings forecasts, the revision cycle is stabilizing and
we expect a moderate upgrade phase may commence in 2H12. Our top-down
MXAPJ index ‘per share’ forecasts are in line with consensus at $38 for 2012, but
we are moderately ahead of consensus at $44 for 2013 vs. $42 for bottom-up street
estimates. With (local currency) EPS growth picking up to 15% in 2013 from 9%
this year, we believe current valuations have potential to expand further from
levels that are still inexpensive even after strong 1Q performance. Our top-down
valuation models all point to about 8-10% valuation upside from current levels
(11.4x forward earnings, 1.5x trailing book) in the context of the macro
environment we envision.
Risks: Oil, politics, policy, inflation. High oil prices remain a concern, particularly
the threat that they could rise further if Iran-centered tensions escalate. The 2Q
political calendar includes presidential elections in France, where a victory by
Socialist candidate Francois Hollande could revive concerns over the Euro area
debt and growth outlook. Policy decisions in both the US (QE3 initiatives may be
announced by the FOMC in 2Q) and China (monetary and/or fiscal
accommodation) will be important market influences in the upcoming quarter.
Looking into 2H12, better global growth and sustained high oil prices could mean
that the decline in inflation in many Asian economies reverses and policy tightens
more than markets presently expect.
Implementation: Focus on relative value trades
We emphasize relative trade ideas given falling intra-regional stock correlations and a
potential period of consolidation. Ideas include inexpensive ASEAN names vs.
expensive cyclicals, banks vs. property, and tech hardware vs. semiconductors. We
also feature updated stock picks and derivative ideas for Australia.
“Inexpensive ASEAN” and “Expensive Cyclicals”
The sharp rally in equity prices during December and January was led, as is often the case,
by cyclical sectors, particularly the “Global Cyclicals”. We expect consolidation and
rotation over the near term, perhaps out of the expensive parts of the cyclical complex that
have rallied and into more attractively-valued companies. As we have noted, correlations
are coming down across the equity space, particularly in ASEAN, and we believe that the
liquid, relatively inexpensive stocks in South East Asia are likely to outperform on a tactical
basis.
Accordingly, we have identified two separate lists of stocks: the first we call “expensive
cyclicals”, which is composed of stocks that have outperformed the market considerably
this year and currently appear near or above their 5-year average valuations. In this
analysis, we consider P/E, P/B, dividend yield, and EV/EBITDA, which we have found to be
relevant metrics when utilizing 5-year z-scores (see AsiaPac Valuation: What works, and
when, March 12, 2012). This group of stocks has returned 36% year-to-date, and for
investors seeking short ideas in a market that has run up relatively quickly, we would offer
the names below, which are large and liquid ($1 billion cap & ADTV of $10 million per day).
On the other side, we highlight select stocks in ASEAN, which have generally
underperformed year-to-date and currently trade below their 5-year average valuations.
The ASEAN markets have traded generally defensively, outperforming during periods of
regional equity pullbacks or “choppiness” (for example, the past month or so). We note
that correlations within ASEAN have broken down, and we adopt varying market stances
within the sub-region. On the whole, however, we believe the “inexpensive ASEAN” stocks
are likely to outperform over the near term as we see little near-term upside to Asian
equities.
Taiwan hardware vs. semiconductors
We believe the investment case of favoring hardware over semiconductors is positive
because of:
Relative performance: Upstream semiconductor-related stocks in Taiwan have
outperformed computer component makers and OEMs meaningfully since the
beginning of last year.
Valuation differentials: Hardware is trading at 15% and 32% valuation discounts
to semiconductors in P/E and P/B terms, some of the deepest discounts in their
respective histories.
Earnings momentum: After a 59% earnings downgrade in 2011, forward earnings
expectations for hardware, particularly non-handset-related, seem to be gaining
momentum.
New products: According to our tech research team, a number of new products
will emerge and mature further in 2012 (see Asia Pacific: Technology: Experiencing
dramatic changes from the inside out, September 28, 2011). Arguably, the entire
tech supply chain will benefit from product proliferation/expansion, but we believe
PC component makers and ODMs/OEMs will benefit more than semiconductors
given the former’s higher operating leverage and lower earnings base.
Relative-value trades in Hong Kong
We see select stocks offering attractive relative trade opportunities for both long-only and
absolute-return investors:
i. AIA vs. Chinese insurers: As per AIA’s 4QFY11 results, it achieved strong growth
in China and some parts of ASEAN, reflecting its strong exposure to domestic
demand in Asia. In addition, AIA managed to outgrow major Chinese insurers in
China last year (50% growth in new value of business for AIA vs. 5% for Chinese
insurers based on our analyst’s estimates), yet is still trading at lower valuations
(12E P/EV at 1.5x versus 1.65x for Chinese H-share insurers). We believe a longterm
relative trade of AIA against major Chinese insurers (e.g. China Life and
PingAn) looks sensible.
ii. Wharf vs. Swire: In general, we prefer exposure to retail (31% of Wharf’s NAV)
over office (35% of Swire’s NAV) in HK as our property team expects a 10% decline
in retail rent in 2012 and flat rates in 2013, versus its assumption of a 10% (central)
to 15% (decentralized areas) decline in office rent in 2012, followed by another 5%
decline in 2013. On valuations, Wharf is trading at 42% discount to NAV, which is
still around 1 s.d. below mean, versus a 10.6% NAV discount for Swire, which is at
the top end of the historical ranges
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