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

Strategy Overview: Asian Equity
Regional Equity Strategy Q4 2007
e. In Malaysia funds flow has been strong since last year in anticipation of positive
elections and pump priming news. We believe incremental funds flow will be quite
slow, with growing risk of outflow should pump priming news disappoint as expectations
from domestic and foreign investors are quite high. Recent budget announcement
turns out to be a non-market event amid sub prime concerns, although it is still an
expansionary budget in our view.
f. In terms of investment spending news, Thailand has yet to unveil its investment
budget for next year. We anticipate the new government next year should
have more fiscal stimulus. We also anticipate that the new government should
have more market friendly measures.
g. In terms of valuations, Thailand trades at a discount to Malaysia, but the
discount is close to its 5-year historical average levels. For Malaysia we recommend
buying into the "elections-beneficiaries" theme for out performance; while
in Thailand we are looking forward to a broad based re-rating in the market.
Re-rating in Thailand can happen from a revival of consumer confidence,
which will boost business and consumer spending. Indeed market has rerated
without earnings joy. We anticipate next year's earnings growth should
be around 13%, markedly up from -3% growth in 2007. A series of interest
rate cuts this year should bolster the case for better earnings growth. Our
Thai research team works out that in the past three instances where there
were rate cuts, P/E has expanded considerably over the same interest rate
downcycle by an average of 147%.
Fig. 48: Thailand vs Malaysia P/E discount
(x)
0.90
0.85
0.80
0.75
0.70
Fig. 49: Thailand: 12-month fwd PER Bands (32, 26, 20,
14, 8x)
1000
900
800
700
600
500
400
300
200
1000
900
800
700
600
500
400
300
200
0.65
100
100
0.60
0.55
Sep-02 Sep-03 Sep-04 Sep-05 Sep-06
40
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: DATASTREAM
40
Our top down model is more sensitive to revival of consumer confidence and valuations. Our blue sky
scenario is for Thai consumer confidence to revive to about 80 (currently at 75.8) which was about the same
level when the interim government took over in January 07, 13% earnings growth for 2008 and a PE rerating
to 12x forward PER from 10.8x currently. That should translate to an index target of 1040.
Our economist has pencilled in three interest rate hikes in the second half of next year based on a brighter
growth outlook. While this interest rate view is non-consensus, we believe the markets will not be particularly
phased as such a scenario would imply that growth has been strong enough to spur demand and inflation;
and that central bank would be confident enough of the sustainability of growth. The regional strategy team
believes that the balance of risk lies toward achieving growth targets where expectations are high and needs
to be monitored closely, rather than an overshooting on inflation and hence the tightening bias. With a new
government in place, and when sentiments are beginning to improve, we believe the central bank will stay
vigilant in its policy moves. Our positive stance on the market is premised on a turnaround in sentiments with
the upcoming elections and better growth outlook for 2008.
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