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

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.
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