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

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Regional Equity Strategy Q4 2007 Strategy Overview: Asian Equity US interest rate cut ranking DBS Economics expectations of a further interest rate cut prompts us to favour markets which would benefit directly from the rate cuts, and markets with exposure to them. Fig. 30: Average -3m return SET HSI STI Sensex KOSPI KLCI H-shares Phisix JCI TWI Utilities Oil &Gas Real Tech S/W Cons. Telcos H/Care Industrials B.Mat Banks Cons. Tech H/W Conclusion % -10 0 10 20 30 Fig. 31: Average +3m return TWI HSI STI SET JCI Phisix Sensex KLCI H-shares KOSPI Tech H/W Telcos Cons. Svcs. Banks Oil &Gas Tech S/W Industrials B.Mat H/Care Cons. Goods Utilities Real Estate % -15 -10 -5 0 5 10 15 Fig. 32: Average + 6m return TWI Sensex KLCI SET HSI Phisix STI H-shares JCI KOSPI Oil &Gas Tech H/W B.Mat Telcos Cons. Svcs. Cons. Goods Industrials Utilities H/Care Tech S/W Banks Real Estate We tabulate our findings in the following factor ranking matrix. Singapore is ranked ahead of other markets, especially with regard to its lesser US exposure and scored well in market earnings and valuations, as well as beta.Taiwan, although inexpensive failed to attract in areas of US exposure. % -10 -5 0 5 10 Fig. 33: Change in Mkt cap 2008 Growth Impact from Retracement Earnings Exports Exports US consumer GDP 2008 Earnings 2008 Fed Cuts 4th qtr Total Overall ERP Beta from High Revisions to US to US exposure Valuations acceleraion GDP acceleraionearnings 3m 6m perf Score Ranking Singapore 3 2 6 1 1 2 6 4 8 3.5 3 3.5 7 4 3 57 1 Indonesia 8 3 3 4 7 6 1 2 3 3.5 9 3.5 5 2 4 64 2 Thailand 4 7 1 5 5 5 4 5 1 6.5 1 6.5 6 6 7 70 3 Korea 5 5 5 2 4 4 8 9 5 8 4 8 1 1 2 71 4 China 6 1 9 3 9 9 2 8 9 1 5 1 2 3 9 77 5 Malaysia 1 9 4 6 8 7 5 1 6 5 6 5 3 7 5 78 6 Hong Kong 7 4 8 8 2 1 3 7 7 6.5 7 6.5 8 5 1 81 7 India 9 6 7 9 3 8 7 6 2 2 2 2 4 8 6 81 7 Taiwan 2 8 2 7 6 3 9 3 4 9 8 9 9 9 8 96 9 Finally, our qualitative assessment differentiates the countries ranked in the middle. Near term policy catalysts leads us to believe Hong Kong and Thailand should be relatively immune from this fallout due to positive domestic developments and interest rate cuts. We upgraded these two markets on August 20. In Malaysia, the budget announcement on September 7 should cause near term pump-priming catalysts to fade. Indeed, Malaysia has shown strong resilience in the sell-off. Hence, we downgrade the market to Benchmark weight. Our preference in terms of market ranking are Hong Kong / China, Thailand, Singapore, Malaysia, Korea, Indonesia, India, and Taiwan. 16
Strategy Overview: Asian Equity Regional Equity Strategy Q4 2007 Hong Kong / China (Upgrade to Overweight) We reiterate our Hong Kong overweight despite it having returned 17% since we upgraded it on August 20. Last quarter we identified Hong Kong as the laggard market in Asia, citing regulatory structural changes in China as a catalyst for outperformance. Against a backdrop of mixed external signals, in particular Fed cuts in September versus potentially disappointing US corporate results in October, we believe that domestic drivers (including retail QDII) will be the main supports for the market in the near term. The various Chinese regulatory changes aimed at diversifying Chinese liquidity flows will continue to influence the direction of the Hong Kong market. These include: - a) Reverse listing in China by China concept stocks in Hong Kong to increase supply of A share listed companies b) The setting up of China Investment Corp to manage China's foreign reserves c) QDII scheme to allow Chinese institutions and corporates to invest in overseas market d) Retail QDII scheme to allow Chinese individuals to invest in Hong Kong In the next three to six months, higher inflation risks heighten policy vigilance. We continue to expect further rate hikes, increases in bank's reserve requirement ratios, and an appreciating CNY, albeit all occurring in a controlled manner. With the recent euphoria surrounding the soon to be implemented retail QDII pilot scheme, we believe it is appropriate to highlight some of the risks. However this does not change our positive stance on the Hong Kong / China market. In the longer term, risks revolve around: a) Overheating risk in the Chinese economy leading to an asset bubble b) Slowdown in the Chinese economy leading to social problems c) Accelerated monetary tightening leading to rise in financing costs and demand-side shocks d) Accelerating liberalisation of capital accounts leading to uncontrollable external shocks As with any government measure we believe uncertainty in pace and magnitude is always a bigger risk than the policy itself. The measured pace and the direction thus far leaves us comfortable with policy risks in China at the moment. We can look to positive policy directions in the annual national congress meeting in October. Will valuations in Hong Kong really catch up with China? Even with the implementation of the retail QDII scheme, we think it is unrealistic to believe that valuations in Hong Kong will finally catch up with China. Overseas investors made up 41% of total cash market trading, whilst in the securities derivatives market, 21% are from overseas institutions and 48% from principal trading. With such openness in the Hong Kong market, we do not believe the Chinese wall of money will dominate Hong Kong trading and push valuations up asymmetrically. Given the extent of institutional participation in the Hong Kong market, valuations are more likely to track fundamental drivers such as earnings, and company specific risk factors. 17
Page 1 and 2: Top Down Strategy and Large Cap Sto
Page 3 and 4: Table of Contents Regional Equity S
Page 5 and 6: Stock Profiles Key Data Regional Eq
Page 7 and 8: Strategy Overview: Asian Equity Reg
Page 15: Strategy Overview: Asian Equity Reg
Page 31 and 32: Regional Data Monitor Regional Equi
Page 33 and 34: Country Assessments & Stock Profile
Page 35 and 36: Country Assessment Regional Equity
Page 45 and 46: Stock Profile: CDL Hospitality Trus
Page 47 and 48: Stock Profile: F & N Regional Equit
Page 49 and 50: Stock Profile: SembCorp Industries
Page 51 and 52: Stock Profile: UOB Regional Equity
Page 67 and 68:
Country Assessment Regional Equity
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Page 71 and 72:
Stock Profile: China Mobile Regiona
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Stock Profile: Dongfeng Motor Regio
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Stock Profile: ICBC Regional Equity
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Stock Profile: Lee and Man Paper Re
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Stock Profile: AMMB Holdings Region
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Stock Profile: Bumiputra-Commerce R
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Stock Profile: Resorts World Region
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Stock Profiles: Advanced Info Servi
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Stock Profiles: Charoen Pokphand Fo
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Stock Profiles: KASIKORNBANK Region
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Stock Profile: Bank Rakyat Indonesi
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Stock Profile: Semen Gresik Regiona
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