Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Regional Equity Strategy Q4 2007
Strategy Overview: Asian Equity
External liquidity, in particular pension and mutual funds subscription into equity funds
have been strong and stable in the last few years. The selling we are seeing in this
correction is in liquid markets to meet the wave of redemptions, and not due to changes
in the growth outlook. Even with this rout, mutual funds subscription into equities is still
relatively better than subscriptions into bond funds. If there is a conspiracy theory, a
weaker outlook for credit bonds and US equities should encourage inflows into emerging
equity funds.
Short-term illiquidity plainly implies short-term volatility. The squeeze on liquidity is
impacting yen-carry positions (they are being unwound), government bond yields (they
are falling) and corporate bond spreads (rising). These will continue to be markers to
watch for signs of improvement in short-term liquidity conditions.
Fig. 9: JPY/USD
126
122
118
114
110
106
Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07
Fig. 10: US junk bond spreads
bp
500
450
400
350
300
250
200
Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07
Fig. 11: Flight to quality also means selling in emerging
markets to treasuries, as evident in the 10-year
bond yield movement
5.4
5.2
5
4.8
4.6
4.4
4.2
4
Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07
Fig. 12: MSCI Far East ex-japan liquidity model with
yen and bond yields
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
Actual
Modelled
Jan-07 Mar-07 May-07 Jul-07 Sep-07
Modelled regression equation: FEXJ weekly return = 1.6 x
Yen / USD weekly change - 0.2 x weekly change in US
bond yield + 0.43 constant (R2 = 60%, data from Jan - Jun
07)
10