SUMMARY
Will growth be higher in 2013?
This is the key question for investors in deciding positioning for the
remainder of the year. Our view remains positive and we continue to
favour cyclicals and financials ahead of defensives.
CATALYST
Central banks united for first time since 2009
Central banks are aligned in a global effort to boost growth for the first
time since 2009. Weak current economic performance adds weight to our
view that 2013 growth will be higher than 2012.
IMPLICATIONS
Upgrade Technology & Taiwan, downgrade India
We upgrade the technology sector and Taiwan to OVERWEIGHT. We
downgrade India on policy concerns and add Samsung Electronics,
Komatsu, Mediatek and Jiangxi Copper to our top cyclical picks.
Will growth be better in 2013?
“Less Growth, More Easing” remains our mantra for 2H12. The recovery in regional markets since June has
continued despite disappointing corporate earnings and weak economic growth. Central banks are aligned,
for the first time since 2009, in a global effort to combat deflation and boost growth. For markets to
continue to rise however, we need to take the view that 2013 global growth will be higher than 2012.
Growth in 2012 has been weaker than expected, with the global economy expanding at less than 3% amid
major 2Q growth disappointments. The US economy is struggling to stay above “stall speed” of 1.5%
annualised growth while Europe’s recession has worsened. Japan’s post-quake recovery has been weaker
than expected. In emerging markets, China and India are struggling to keep growth above 7% and 5%,
respectively. With a turn in growth unlikely before 4Q12 at the earliest, this makes it all the easier for 2013
to be a better year than 2012.
Still, despite the low base in 2012, current pro-growth policies will have to have some impact in turning
around the current slump in global growth. We see the following areas of optimism:
1) Signs of US housing market recovery. Our economics team have their eyes fixed on the promising
signals in this area and this is probably the single most important factor in taking a view on 2013.
The housing market is also a key area of focus for US policy, which has more of a domestic than an
international agenda than market commentaries would imply.
2) Pickup in China’s investment cycle. This is proving to be difficult given the excesses of the 2008
stimulus package, but leading indicators such as infrastructure spending, money supply growth
and property transactions have already turned the corner.
3) Smaller contraction in southern Europe’s economies. After two years of huge contractions,
current EU moves to restore liquidity and confidence in southern Europe’s financial sector are
aimed at slowing the pace of contraction. Economies like Germany’s will also receive an
immediate boost if US and China growth picks up.
4) Japan’s economy may slow again in 1H13 as the post-quake recovery ends but we expect growth
to pick up again in 2H13 ahead of the consumption tax hike in early 2014.
5) Elsewhere in Asia, while we remain bearish on Indian policy options before the next election in
2014, a drop in growth below 5% may spur more immediate measures to be taken.
The recent recovery in commodity prices also reflects some optimism that the recession/deflation scenario
that markets price in during 2Q is now less likely and that growth can recover in 2013. Although commodity
prices have recovered, pure China-driven prices like cement, steel and iron ore have fallen, which is
worrying.
Sector and country recommendations
We remain OVERWEIGHT cyclicals, EQUALWEIGHT financials and UNDERWEIGHT defensives in Asia for
2H12. We include consumer discretionary as one of our OVERWEIGHT sectors while consumer staples is our
key UNDERWEIGHT for the region.
Sector allocation
We have upgraded the technology sector as we see it as a natural beneficiary of our view that 2013 global
growth will be higher than 2012. The sector has underperformed this year. The main risk to our upgrade of
the technology sector is the likelihood of further near-term downgrades of earnings estimates.
Country allocation
We upgrade Taiwan to OVERWEIGHT and downgrade India to NEUTRAL. The upgrade of Taiwan matches our
upgrade of the technology sector, although we also like the energy and materials exposure offered in
Taiwan. The risks to our upgrade are the same as for our view of higher 2013 global growth.
Our downgrade of India is based on the bearish views contained in our latest economics team report Eye of
the Tiger. We agree that the current policy deadlock amid high inflation will be a tough one for the current
government to overcome, and indeed we may need to wait until a new government is formed in 2014 to
break the deadlock. We, however, only move India from Overweight to NEUTRAL because:
1) India’s equity market has a strong positive correlation with commodity prices, so it is likely to be
at least an in-line performer during “risk on” periods;
2) 38% of Indian equity market earnings are derived from global cyclical sectors, the fourth highest
exposure in the region.
Stock picks
We make the following changes to our Top 15 cyclical picks:
§ Samsung Electronics and Mediatek are added, in line with our upgrade of the technology sector and
Taiwan;
§ Reliance Industries and Larsen & Toubro are removed, in line with our country downgrade of India;
§ Komatsu (recently initiated) is added as our top pick in Japan’s capital goods sector, replacing Canon
(recently downgraded to Hold);
§ Jiangxi Copper (recently initiated) is added as our top pick in the China metals sector, replacing JFE
Holdings (as we already have Japan metals exposure through Marubeni)
Company
Cathay Pacific
China Shenhua
CNOOC
Hynix
Hyundai Heavy
Jiangxi Copper
Komatsu
LG Chem
Marubeni Corp
MediaTeK
SAIL
Samsung Elec
SK Innovation
United Tractors
Zoomlion
Aggregate
Average
We have expanded our mid-cap cyclical picks to include the following stocks:
Technology: GREE, Hitachi Hi-Tech, Ricoh;
Commodities: Indocement, Taiwan Cement, Hongqiao, Bharat Petroleum, Adaro Energy, Golden Agri, Astra
Agro;
Industrials: Hitachi Construction, Zhuzhou CSR, Teco, Cummins India.
Financial sector picks
Our preference within the financials sector is for diversified financials while we are more selective within
the banking and insurance sectors. Broadly speaking, we prefer banking over insurance in the region and
prefer North Asia banks over South Asia.
In Japan, we like Mitsubishi UFJ among the larger banks and Bank of Yokohama among the regional banks.
In Korea, we prefer insurers to banks with top pick Samsung F&M. In China, we prefer banks and brokers to
insurers with top picks ICBC and Citic Securities. In Hong Kong, Bank of China (HK) and Standard Chartered
are our top picks. We think in Thailand most large banks look fairly valued and we recommend looking at
smaller caps such as Tisco Financial. We prefer infrastructure finance companies in India, with top pick
Power Finance. ICICI Bank is our private sector pick and State Bank of India our pick in the higher-risk PSU
sector. Bank Rakyat and Bank Mandiri are our top picks in Indonesia. In Singapore, we like DBS as a key
beneficiary of the retreat of western banks in Asia and in Malaysia, Hong Leong Bank. In Taiwan, we prefer
banks over insurers as easing policies threaten bond yields. Top picks are Chinatrust and E.Sun.
We cover the property sector in Hong Kong, Singapore and India. Swire, Wharf, Capitaland and Oberoi are
among our top picks.
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