Get set for a liquidity rally - the DBS Vickers Securities Equities ...

Regional ETF Guide
Get set for a liquidity rally
On stretched valuations to +1SD of 10-year average
valuations, potential returns can be 17% from current
levels. That said re-rating drivers from liquidity will render
valuations expensive. We believe rotational interest into
value laggards will bring about the re-rating, and a
convergence towards 14x P/E will be the likely re-rating
path. We thus prefer Thailand and Korea as potential
candidates for re-rating, Indonesia and China for growth
surprises.
We are underweight in Taiwan on potential earnings
disappointment and India on de-rating from higher
valuations.
High price to book will cap upside
One reservation we have for more upside is high price to
book value multiples.
Our valuation study has found that price to book is one of
the better indicators for projecting 12-month forward
returns. Current levels indicate a negative return for the next
12 months.
Asia price to book vs 12-month forward performance
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
2.60
(x)
2.80 -80
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
ASIA EX JAPAN-DS Market - PRICE/BOOK RATIO (REVERSE SCALE)
12M FORWARD RETURN (R.H.SCALE)
Source: Datastream, DBS
(%)
100
80
60
40
20
0
-20
-40
-60
Source: DATASTREAM
Upside surprise from growth needs further catalysts
At this juncture we do not see upside surprise from growth
projections. After a strong economic year in 2010, DBS
economist refers to next year’s growth as more normalised
with a return to growth trend. A gloomy outlook for the US
and Europe hinders a more optimistic outlook for the
region.
QE2 and reflation
We believe the direct beneficiaries for QE2 will be
commodities and properties. QE2 will help bring interest
rates down with the purchase of long term securities. At
Asia market economic growth and earnings growth
forecasts
GDP growth, % YoY Earnings growth, % YoY
2010f 2011f 2010f 2011f
US 2.8 2.4 39.7 13.8
Japan 2.7 1.6 79.5 17.1
Eurozone 1.7 1.5 35.3 16.0
Indonesia* 6.0 5.8 17.3 14.6
Malaysia* 8.0 5.5 16.8 14.3
Philippines 6.2 5.0 22.3 12.4
Singapore* 15.0 4.5 18.8 12.8
Thailand* 9.0 4.0 19.5 13.9
China* 10.0 9.5 13.9 11.8
Hong Kong* 7.0 4.5 15.8 13.7
Taiwan 9.5 3.8 90.3 9.2
Korea 6.2 3.9 55.3 6.3
India 8.8 8.5 23.4 22.3
Source: DBS forecasts (GDP), IBES (earnings growth) except for
markets marked with *s which are DBSVickers coverage.
Earnings growth for Hong Kong refers to HSI and China refers
to H-share universe
the same time with inflation targeting real interest rates will
also fall. Commodities are good inflation and weak USD
hedge. But we are selective on Asia property sector as an
inflation hedge due to tightening fears in Asia.
Interest rate tightening in Asia, however
In Asia interest rate hikes will be the main concern. In 3Q10,
Asia central banks showed their confidence on growth with
rate hikes. Due to very strong domestic demand and
inflows, inflation in Asia continued to rise, pressurising
central banks to raise raises.
DBS economists believe that rate hikes will continue in
4Q10. Singapore tightened its grip on monetary policies by
steepening and widening the SGD NEER currency band to
allow for more and faster appreciation in early October.
That was followed by RRR hikes and interest rate hikes in
China. We expect most other Asia countries to follow suit.
That said, the strategy team believes that Asia central banks
are facing a dilemma in balancing growth and inflation. As
such a rate hike should signal confidence rather being seen
as restrictive on growth. On the other hand, central banks
might send the wrong signal if rates are not raised, either
being perceived as non-independent or too complacent, or
lack of confidence in growth.
Interest rate normalisation, at least hiking towards mid point
of the precrisis level, should be taken as a healthy move
towards prevention of a build up of inflationary
expectations. The strategy team believes most Asia countries
will slow the interest rate normalisation process.
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