Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 Strategy Overview: Asia Equity Fig. 8: Hong Kong: Affordability vs mortgage lending rate 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-94 Jun-95 Nov-96 Apr-98 Sep-99 Feb-01 Jul-02 Dec-03 May-05 Affordability ratio (LHS) Oct-06 Mortgage lending rate (RHS) Source: Centaline Property Agency, CEIC, DBS Vickers Mar-08 12% 10% China: We don't see a bubble across the board in China as the nationwide affordability ratio is still lower than that in 2005 when most people viewed property prices as affordable. However, some cities, such as Beijing, Shenzhen, Tianjin did see affordability ratios rise to a level much higher than in 2005. Having said that, housing prices in these cities are still more affordable than those in 2007. As China statistics tend to underestimate household incomes, we would believe actual affordability is better than the reported numbers. Jul-09 Fig. 9: Affordability ratio by different cities in China Basd on price of Jul 09 2007 2005 China 44% 52% 49% Shanghai 61% 66% 61% Beijing 89% 75% 61% Shenzhen 53% 75% 45% Tianjin 58% 57% 51% Hangzhou 61% 72% 58% Chengdu 46% 55% 45% Chongqing 29% 38% 31% Guangzhou 53% 67% 51% Wuhan 47% 62% 49% Source: CEIC, Soufun 8% 6% 4% 2% 0% Singapore: Based on our affordability ratio calculations, where we assume a 30-year loan tenure at an average 5.5% interest cost (vs current rates at under 2%) for a 110 sqm mass-market condominium unit, affordability still remains reasonable (about 40% of monthly income for the 85th percentile household) even with a 20% increase in home prices from trough levels. We have also assumed that household incomes fall 10% in 2009 and show zero growth in 2010. This is still a much healthier ratio as compared to during the pre-Asian Financial Crisis housing bubble. Fig. 10: Singapore affordability ratio $1,200,000 $1,000,000 $800,000 $600,000 $400,000 Source: DBS Vickers Credit 1996 1998 2000 2002 2004 2006 2008 2010F Median Price of Mass Condo (LHS) % Household Income for Mortgage (RHS) 65% 60% 55% 50% 45% 40% 35% 30% 25% Economic bubbles are often referred to as credit bubbles as credit is easily made available to everyone and deflated through a subsequent tightening of credit. What we have found in Asia is that credit growth is still way below past crisis levels except for China where this year's credit growth has been phenomenal and a credit tightening is on the cards. Our China banking analyst believes that a slowdown in China's lending growth in the second half of the year is consistent with seasonality and should not be a major concern. Government officials have clearly stated the "moderately loose" monetary policy will remain, and only market tools (instead of administrative measures) will be used when conducting "dynamic fine-tuning". We believe market tools to be used include open market operations or even mild hikes of RRR and interest rates. While guidelines to ensure loans are directed to the real economy are possible, administrative controls such as loan quota policy is unlikely. Page 11
Regional Equity Strategy 4Q 2009 Strategy Overview: Asia Equity Fig. 11: Credit growth in Asia by markets, %YoY Dec-07 Dec-08 Mar-09 Jun-09 Jul-09 HK 19.5 -6.6 -0.7 9.6 8.2 S'pore 19.9 16.6 8.6 4.2 2.3 Malaysia 8.5 15.8 15.4 11.9 12.5 Indonesia 26.4 30.7 26.1 19.2* NA Thailand 4.9 9.3 6.4 3.2 2.7 Taiwan 4.0 3.6 1.1 -0.3 -0.8 Korea 14.9 14.1 12.1 8.8 7.7 China 16.2 15.9 27.1 31.9 31.4 India 20.4 22.3 17.4 16.3* NA Source: Datastream. * Refers to May’s number Fig. 12: Credit growth in China (RMBbn) 4,000 3,600 3,200 2,800 2,400 2,000 1,600 1,200 800 400 0 568 414 442 422 247 452 231 303 284 136 Source: CEIC, DBSVickers 87 48 Opportunities and Risks 804 243 283 464 382 332 319 272 375 182 477 1Q09: 4,580 (50% of total) 2Q09: 2,787 (30% of total) 3Q09F: 1,100 (12% of total) 4Q09F: 742 (8% of total) Our asset allocation strategy for the fourth quarter is based on the premise that the index will remain in consolidation mode, with an upside bias. The major resistance will come from higher valuations and slower earnings upgrade momentum in Asia. While the outlook for recovery remains bright in our view, uncertainty of forthcoming macro policy changes remain the key dampener for sentiment. We take the view that it is too early to worry about this. Investors can look forward to the following opportunities whilst staying mindful of the following risks in the coming quarter:- 1. Synchronised global upturn in the making. We believe the global GDP data will improve sequentially, beginning with Asia which had bottomed in 1Q, US in 2Q, and subsequently Europe in 3Q. The likelihood for data to disappoint is low in our view and bottoming may come in earlier than expected. Meanwhile, world valuations are still at very low levels which mean there is still room for P/E expansion. The potential for global 772 1,620 1,070 1,890 592 665 1,530 356 420 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 markets to re-rate in line with a sharp recovery in GDP growth over the next 6-12 months should keep the global equities market uptrend intact. Asia's growth, being high in beta, should continue to benefit from the positive trend in economic momentum. 2. Against this backdrop, Asia's valuation is high when compared to the world, and given that economic momentum will be slower. There is a threat of fund flows favoring the rest of the world vs Asia since emerging markets already had its fair share of recovery gains earlier in the year. There are two reasons to believe that Asia is still a good bet:- a. Cash levels for allocation has dwindled near towards the low pre crisis for both emerging markets and global funds. From this angle the easy allocation from cash to put money to work is not available anymore - new money has to be drawn into equity markets. b. In terms of net sales, emerging market has been able to attract more new sales when compared to global and international funds. The attractiveness of emerging market growth versus growth in developed markets has been well proven. Asia's growth has demonstrated a very sharp v-shaped recovery and economic growth is expected to exceed 6% in the next two years. This is about 3 times the growth rate in G3. With the ongoing uncertainty and herd mentality, we continue to believe emerging markets including Asia can continue to attract new flows. Fig. 13: US mutual funds cash levels by fund category % % 12 11 10 Emerging (R) 9 Global (L) 8 7 6 International (R) 5 4 3 2 Jan-07 Mar-07 May-07 Current 2007TDAvg Low Global 7.7% 7.4% 6.6% International 3.6% 4.3% 4.1% Emerging 4.5% 4.4% 4.5% Source: Datasream, DBS Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Page 12
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