The Asia Investigator - Where To With Earnings? ::Citi Research

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The Asia Investigator
Where To With Earnings?
 Asia: Concerns have shifted to the impact on corporate earnings — Prior
recessions have led to earnings falling anywhere from 10% during the 90’s
recession to falling 48% in 2008. During 1997, earnings fell by 94%. Still, the past
may not be a reliable guide to the future, nor is it the case with nominal GDP growth
vs EPS growth. The relationship is weak, so take the result with a pinch of salt. A
0.5ppt drop in nominal GDP means a 4ppt fall in EPS growth. A 1.5ppt decline in
Asian nominal GDP would equate to zero EPS growth at present.
 Australia: The market could recover recent losses by year-end — Markets have
settled down somewhat in recent days, seemingly from a combination of their
having declined enough to take account of the risks as currently perceived from
recent events, and in response to the policy actions taken in the US and Europe.

 India: 1QFY12 results review – Hanging on — India’s earnings growth continues
to tread middle growth: +5%yoy for Sensex ex-oil (and 6% for CIRA ex-energy)
remains in-line with expectations (+7%), relatively modest and simply not decisive
enough. It has a slightly weak bias: 52/45 downside/upside surprises, more sectors
disappoint than surprise positively, and management commentary at aggregate has
been relatively cautious.
 Japan: FRB again steering toward easing: What are differences with 2010? —
After its August 9 FOMC meeting, the FRB announced it would continue its nearzero
interest rate policy until mid-2013. The current situation looks somewhat like
2010, in that the FRB is steering toward easing with European problems smoldering
and concerns arising about a US economic slowdown.
 Fun with Flows: Redemptions slowed but uncertainties remained — Outflow
from all EM equity funds came in at US$2.8bn (-0.44%AUM), about 1/3rd of the
previous week's redemption size. GEM funds’ redemption was only US$468mn
(-0.15%AUM) for the week. By regions, outflows from AxJ (-US$1.4bn, -0.63%AUM)
and LATAM (-US$256mn, -0.58%AUM) funds slowed sharply to come in at less
than half of the previous week’s size; EMEA apparently (-US$647mn, -1.58%AUM)
lagged in pace. Overall EM outflows appeared quite balanced between ETF and
non-ETF funds.
India Equity Strategy -1QFY12 Results Review – Hanging on
 +5%: in line with expectations, but with a weak bias — India’s earnings
growth continues to tread middle growth: +5%yoy for Sensex ex-oil (and 6% for
CIRA ex-energy) remains in-line with expectations (+7%), relatively modest and
simply not decisive enough. It has a slightly weak bias: 52/45 downside/upside
surprises, more sectors disappoint than surprise positively, and management
commentary at aggregate has been relatively cautious. While bottom up and
global macro challenges rise, India’s earnings growth expectations (20%)
continue to hang on, but just about.
 Sales still surprise and margins still face pressure — We expected sales
growth to surprise on the downside, and margin pressure to surprise on the
upside: was not to be. Sales momentum remains strong (+19% for CIRA univ exfin,
energy) and margins continue to face pressure (-74 bps qoq). However,
sectoral divergence is rising, interest cost pressures are yet to show up
meaningfully and trends among Sensex companies and broader CIRA coverage
are largely consistent – suggesting growth/profit trends are broad-based.
 More laggards than leaders — It is a mixed quarter, with a weak bias: with 6/3
downside/upside sectoral surprises, 12/15 sectors generating positive yoy profit
growth, and only four sectors generating positive margins qoq. The banks and
Capital goods sectors have been the big laggards on the downside: with positive
offsets in Energy (in part accounting), and Metals and Cements. The defensives
– consumer companies have held their own, while Autos have also done a bit
better than expected.
 Quarter’s take-away; it’s tough but corporates hanging in there — The
earnings season is – in our view – not decisive. It reflects the broader growth,
profitability and global macro challenges that businesses are facing; but suggests
slower/weaker growth, not an earnings collapse. Our Sensex earnings growth
estimates for FY12/FY13 stand at 20%/16%, and we would expect GDP growth,
the commodity and energy pricing cycle to keenly influence earnings trends from
here.