Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Strategy Overview: Asia Equity
2010 growth (%)
Risk premiums declining as risk appetites improve
Providing more fuel to our argument that Singapore's equity
valuations have more room for upside is the equity risk
premium (ERP). After the significant decrease in risk aversion
since March 2009, the ERP has reverted to its long-term
average levels of 4.2%. (Fig. 25)
Fig. 25: Singapore equity risk premium
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
(%)
1.0
0.0
01 02 03 04 05 06 07 08 09
Source: Datastream, DBS. Earnings yield minus Singapore 10-year bond
yield
Our sensitivity analysis points to a further 2% upside for the
FSSTI index if consensus forecasts of 18% earnings growth in
FY10 holds. We arrive at a target of 2800 for the next 3
months, where it will be supported by P/B and ERP calculations.
In 2010, we could be looking at support levels of up to 18%
from current levels if we expect “e” to return to pre-crisis levels
by 2011. (Fig. 26)
Fig. 26: Potential return from Interest rate / Growth
sensitivity analysis based on ERP mean revision
Singapore Long Bond yield (%)
1.5 1.75 2 2.25 2.5 2.75 3
18 11% 7% 2% -2% -5% -9% -12%
23 16% 12% 7% 3% 0% -4% -7%
28 21% 17% 12% 8% 5% 1% -2%
33 26% 22% 17% 13% 10% 6% 3%
38 31% 27% 22% 18% 15% 11% 8%
43 36% 32% 27% 23% 20% 16% 13%
48 41% 37% 32% 28% 25% 21% 18%
Current support
12-mth target
Source: Datastream. Based on current index of 2681 and bond yield of
2%
The regional strategy team is arriving at a STI index target of
3400 by end 2010. This is derived from a forward PER of 16.3x
on 2011 “e” returning to pre-crisis high in 2007. We believe it
is achievable for the “e” to return to pre-crisis level as
accordingly absolute GDP level will return to pre-crisis levels by
end of 2010 based on our nominal GDP growth forecasts.
Hong Kong / China downgraded to Neutral
Our Hong Kong strategist, Derek Cheung, is concerned of a
correction on a market which has been driven by (1) high
hopes of a US economic recovery, which may disappoint and
(2) huge PRC pump-priming, which may dissipate (See Hong
Kong strategy: “Wolatility, - wake up call"). While the regional
team agrees that a pull back as a result of profit taking is
probable, the downside should remain well supported at
average valuations as the anticipated earnings upgrade after
the result season has been on track. Derek's forecast for HSI at
14000 represents a worst-case scenario should negative events
converge on the market, which has thus far been more
focused on upside surprises.
Hong Kong's valuations are not excessive
HSI managed to hold steady despite the sharp correction in the
'A' share market in August. Calculations based on P/B and P/E
valuations showed strong support at current levels (Fig.
27&28). Bottom-up P/B screening also identify Hong Kong
banks and industrials as being attractive in terms of P/B
valuations (Fig. 29&30). With the recent M&A interests in
Hong Kong Banks, and the strength in China's PMI and global
IP, we expect these two sectors to drive the index higher.
Fig. 27: HSI 12month fwd PER
25
23
21
19
17
15
13
11
9
7
5
93 95 97 99 01 03 05 07 09
Source: Datastream
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