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

Strategy Overview: Asian Equity
Regional Equity Strategy Q4 2007
Another application of the DDM is to calculate the fair value with different ERPs, as
shown in Figure 18.
From the above analysis, we conclude that one percentage point change in ERP produces
a 9% change in the index. From a risk reduction point of view, from the US sub-prime
fallout, Asia is sold as an emerging asset class, and markets with higher betas will be
affected more. Our base case scenario is that normalcy will return as markets slowly
digest the negative news, and we will look for high beta markets in this rebound. Our
ranking for beta markets is shown below (Fig 19).
Some markets have rebounded strongly since the correction. We believe Asian markets
will recover to previous highs, as other than risk appetite, fundamentals have not deteriorated.
There were also no obvious signs of negative earnings revisions in the past two months.
Once risk appetite returns to normalcy and beta markets rebounded, market specific
drivers will have to be considered. We believe risk appetite in Hong Kong and Thailand
will improve due to positive sentiments although the markets are pricing in higher ERPs,
wherease near-term catalysts for Malaysia and Taiwan are less oustanding although
they are already cheap.
Fig. 19: Beta with MSCI AC World Index
1.2
1
0.8
0.6
0.4
Note: Based on one year of daily data
0.2
H-sh
Fig. 21: Ranking of earnings revisions in last 2 months
%
12
10
8
6
4
2
0
-2
-4
STI
JCI
HSI
KOSPI
Sensex
SET
TWI
PSE
KLCI
2007 2008
Singapore
Korea
China
Indonesia
Thailand
Asia ex-Japan
Malaysia
Taiwan
Hong Kong
India
Philippines
Fig. 20: Ranking of retracement from previous high
%
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
-7.0
-8.0
-9.0
-10.0
Thailand
Taiwan
Indonesia
Malaysia
Korea
Singapore
Red-chip
Shanghai
India
Hang Seng
H-share
13