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Regional Equity Strategy Q4 2007 Strategy Overview: Asian Equity Asian Equity: Fire walk with me • Fire walking, it is said, transforms fear into power. Investors in Asian equities should walk through the US' sub-prime-related volatility and stay focused on the region's underlying fundamentals. Investors around the globe are fixated with three main concerns – the risks to the US economy, a global liquidity crunch and a contagion impact from US subprime problems to other asset classes. We believe that the volatility offers good opportunities for accumulation, in anticipation of a year-end rally commencing in November • The bond market has factored in the latest Fed rate cut to alleviate the liquidity problems in the financial system. This was less so for equity markets. Equities markets had cheered the latest rate cut, as expected. We now look for another 25bps cut in October. But if the Fed cut does not transpire because credit conditions have stabilized and US growth outlook is intact, there should be more reasons to buy equities. • We recommend Hong Kong / China for liquidity, Singapore for valuations and earnings quality, and Thailand for accelerating growth in 2008. We downgrade Korea and continue to avoid Taiwan due to exposure to the US consumer. As for sectors, we recommend specialised small caps leveraged to Asia's structural growth and global business spending, and diversified large caps for all-round economic expansion. There are also opportunities to buy Asian financials on lower prices as they become oversold on the back of current sub-prime concerns • In our regional allocation, we have upgraded Hong Kong / China and Thailand at the expense of Malaysia and Korea. We are underweight Korea and Taiwan, benchmark-weighted in Malaysia, Indonesia and India, and overweight in Hong Kong /China, Thailand and Singapore Fig. 1: Who’s afraid of little fire? Note: The weightings which we refer to in our Equity Strategy outlook are not necessarily consistent with the equity “weightings” being used in our Asian Tactical Asset Allocation. The latter refer to specifically constructed benchmarks for asset allocation purposes. 4000 3500 3000 2500 2000 1500 1000 500 20 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 0911 ASIA EX JAPAN-DS Market - PRICE INDEX Source: DATASTREAM Joanne Goh • (65) 6878 5233 • joannegohsc@dbs.com 6 "This report has been re-printed with permission from DBS Group Research (Regional Equity Strategy) of DBS Bank Limited"
Strategy Overview: Asian Equity Regional Equity Strategy Q4 2007 Markets hit bottom, volatility to last two months We believe that the market volatility related to the US sub-prime woes is temporary. Once the dust settles, especially in relation to poor sentiment arising from secondguesses on how badly banks and other financial institutions are exposed to subprime mortgages, the Asian markets should return to their upward trajectory. We expect the market to be range bound in the next two months as investors grapple with choppy global markets and re-balance portfolios. Timing a market bottom is a perennial challenge. For all its worth, the markets may well have hit bottom during the wave of heavy selling on August 17. However, with the rebound in prices in recent weeks, short-term relative strength indicators are currently in neutral territory, and do not point to an imminent reversal. Meanwhile, valuations and fundamentals continue to provide support at current levels; and upcoming market events suggest that early October may be the most opportune time for aggressive accumulation. Hence, we recommend building up positions for a year-end rally, which we believe, will commence in November. Vulnerability of the US economy DBS Research believes that while the worst is over for the US economy, the expectation is for a weak recovery in the US to sub-potential growth rates. Specifically the forecast is for a paltry 2.0% (QoQ, saar) growth in Q3, after 4% growth in Q2 and 0.6% growth in Q1. By Q4 and throughout 2008, the economy should grow at a (saar) pace of 2.5%-3%. This view is premised on expectations for i) weak consumption growth and ii) that the drag from housing construction will continue to fade in the coming quarters. In DBS view, a recession is not on the cards despite growing concerns of the US housing market slump's impact on consumer spending. The US will still be releasing expectedly poor economic numbers in the next three months, in terms of job growth, consumption and housing market expansion, which will induce market volatility. Commercial paper will remain expensive in the short run. However, these are not enough to drive the economy into a recession, but sufficient to lead the Fed to believe that rate cuts are necessary before the economy turns for the worse. If the drag from housing does not fade, then GDP growth might continue to ramble along at about 2%, as it had in the past 5 quarters (2.2% for the past seven quarters). While plainly not a plus for Asia, weak US growth in the last two years has not prevented Asia from accelerating modestly and another year of expectedly weak 2% growth in the US should not make a difference to Asia. Indeed, the bias should be towards a pick up in growth after this soft patch, considering the underlying resilience of the US economy over the last eight quarters. Against the backdrop of a weak US recovery, investors will remain focused on domestic demand sectors in Asia, while staying vigilant to an inflection point for recovery in external demand. 7
Page 1 and 2: Top Down Strategy and Large Cap Sto
Page 3 and 4: Table of Contents Regional Equity S
Page 5: Stock Profiles Key Data Regional Eq
Page 9 and 10: 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
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Country Assessment Regional Equity
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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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