August: Risk aversion takes its pound of flesh ::Macquarie Research,

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August: Risk aversion takes its pound
of flesh
Latest risk-off episode moves stocks into value territory
 The MSCI Asia ex-Japan index fell a net 10.2% in August – its worst month
since October 2008 – as global risk-aversion rose to post-GFC highs. Also on
the month, region-wide aggregate 2011 earnings consensus fell by 2.2%,
albeit this is a much milder earnings downgrade than the -6.2% 4-week
revision of 2009 estimates that accompanied the Oct-08 market plunge.
 Valuations-wise, with August‟s sharp correction, forward PER multiples in
Asia ex-Japan (10.6x region-wide) offer a -12% discount to 10-year mean;
and the regional „Equity Risk Premium‟ offers two-standard-deviation levels of
compensation relative to low-yielding (2.2%) risk-free 10-yr US Treasuries.
China, now at a single-digit PER multiple of 9.3x, trades at by far the region‟s
deepest PER discount (-27% -- more than double the region-wide discount).
Export-heavy markets have borne the brunt
 Unsurprisingly, Asia‟s more cyclical and externally exposed markets bore the
brunt of August‟s sharp correction. Export-heavy MSCI Korea (-12.4%) and
MSCI Singapore (-10.7%) both underperformed the MSCI regional
benchmark. Outperformers were chiefly US monetary policy-linked Hong
Kong (-6.5%) and domestically- or structurally driven (or simply illiquid)
ASEAN markets, led by the Philippines (-4.3%).
 Unsurprisingly, by sector, defensive Food/Staples Retailing (+2.4%),
Household/Personal Products (-0.3%), and Telcos (-0.6%) sectors
outperformed – albeit most defensive sectors now stand out as comparatively
expensive (with Telcos the key exception, still at reasonable discounts).
 Of note, Thailand, Indonesia and the Philippines all maintained aggregate
2011 earnings upgrade momentum through August – albeit revision breadth in
the Philippines is lacking -- as did the Auto, Real Estate, Telco and
Consumer Durables sectors (albeit the latter two also with less breadth).
Deepest earnings downgrades continue to be in Taiwan, as well as Malaysia
and India; and by sector among Tech and Transport.
Pullback sets stage for market upside through end-year
 Asia ex-Japan markets suffered their third-highest level of foreign equity
outflows on record -- with Northeast Asia seeing the bulk of exodus while
Southeast Asia and India proved comparatively immune. However, data show
foreign net-selling considerably eased by end-month.
 With risk tolerance apparently regaining its footing, we think the market‟s
latest correction has ultimately improved the attractiveness of Asian equities
by driving valuations lower (while at the same time also reducing returns on
„risk free‟ US Treasury bonds). The prospect of further modest firming in US
data and some Chinese policy ease skew market risks moderately to the
upside through end-year, in our view. This outlook is bolstered by large
outstanding short positions in the hedge fund space and 11-month-high cash
positions among benchmarked relative-return managers.