The Asia Investigator - Better Than Expected Good
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Asia Pacific
Equity Strategy (Citi)
Strategy Focus
21 April 2009 80 pages
The Asia Investigator
Better Than Expected ≠ Good
Asia ex: The bull menu contains bigger EPS revisions, better economic numbers
Markus Rosgen 1
and plenty of liquidity — Earnings revisions have been worse than even during the
+852-2501-2752
Asian crisis but the cuts have been small. Economic numbers have come out
markus.rosgen@citi.com
worse than expected for the last 18 months but not for the past two months. This
has given the market hope that the worst may be behind. However, better than China Strategist
expected does not mean out of the woods. There is plenty of excess liquidity due Lan Xue1
to the collapse of industrial production. Page 3
Hong Kong Strategist
Japan: Signs of an environmental bubble—Shades of IT bubble of decade ago — In Anil Daswani1
some ways we think the current environment bears a certain resemblance to that
of 1990-2000, when the IT bubble emerged. The global economic upheaval is India Strategist
larger now than it was then, and the monetary easing and fiscal mobilization in Aditya Narain, CFA 2
response have been much more dramatic. Still, just as the IT bubble emerged
Korea Strategist
after the LTCM crisis in the US and financial crises in Russia and Asia, we think
the current economic crisis might be followed by an environment-related bubble. Michael S Chung3
Page 16 Malaysia Strategist
Singapore: Out of Recession by 4Q09; 12-month STI Target 2400 — 1Q GDP Wai Kee Choong4
contraction of -11.5% is likely to be the worst. We expect a smaller rate of Pakistan Strategist
contraction in 2Q (-8.2%) and 3Q (-6.2%), with good chance of positive GDP
growth in 4Q09 (+0.3%) and 1Q10 (+6.7%). We believe the recession will be over Salman Ali, CFA5
by the fourth quarter. Aggressive global fiscal and monetary easing, coupled with Singapore Strategist
Singapore government’s fiscal measures, and the opening of the two integrated
Hak Bin Chua 6
resorts by early 2010 will support the recovery. Page 24
Taiwan Strategist
Taiwan: Just One More Squeeze — We expect the market to peak soon, but
Peter Kurz7
probably not before another upswing. Local liquidity is strong, short positions and
QFII underweights are significant, and sales momentum, for now, remains Thailand Strategist
positive. Page 53
Suchart Techaposai8
Thailand: Short-Term Relief; Long-Term Settlement — The issuing of an Quant Strategist, Asia Pacific
Emergency Decree for Bangkok on 12 April paved the way for the Army to replace
Paul Chanin 6
the Police in containing protestors under a firm policy stance by PM Abhisit of
non-violence with minimum damage and human casualty. Page 66 Chief Economist, Asia Pacific
Johanna Chua
Fun With Flows: Focus Shifted Towards Korea and Taiwan — Page 71
See Appendix A-1 for Analyst Certification and important disclosures.
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or can call (866) 836-9542 to request a copy of this research.
1
Citigroup Global Markets Asia; 2Citigroup Global Markets India Private Limited; 3Citigroup Global Markets Korea Securities Ltd; 4Citigroup Global Markets Malaysia SDN BHD;
5
Citibank NA; 6Citigroup Global Markets Singapore PTE LIMITED; 7Citigroup Global Markets Inc - Taipei Branch; 8Citicorp Securities (Thailand) Ltd.
Citigroup Global MarketsThe Asia Investigator
21 April 2009 Asia Pacific Strategy Overview
Fresh Money Ideas Model Portfolio (Asia/Pacific ex Japan) Percentage Weighting Over / Under
MSCI Benchmark*
Bloomberg Price Target ETR
code Rating Underweight Overweight
20-Apr-09 Price (%)
-15 -10 -5 0 5
Buy
Samsung Electronics 005930 KS 1L W592,000.00 W810,000.00 37.8 Taiwan (11.2)
Sinopec 386 HK 1L HK$6.19 HK$5.60 -7.8
Hutchison Whampoa 13 HK 1L HK$44.45 HK$54.00 25.4 Hong Kong (9.6)
Bharti BHARTI IN 1L Rs684.50 Rs840.00 22.7
TSMC 2330 TT 1L NT$51.90 NT$59.00 19.5 Korea (14.3)
Sell
Esprit 330 HK 3M HK$41.95 HK$34.00 -13.2 Malaysia (3.4)
Telekom Mal T MK 3L RM3.64 RM3.20 -6.1
COSCO Pacific 1199 HK 3L HK$7.86 HK$5.15 -31.0 Thailand (1.5)
ASUSTeK Computer 2357 TT 3H NT$42.10 NT$24.00 -37.5
Cathay Pacific 293 HK 3H HK$9.08 HK$6.00 -33.9 Aust/NZ (27.5)
Source: Citi Investment Research estimates Philippines (0.6)
Indonesia (1.6)
Singapore (5.0)
India (7.0)
China (18.4)
Model Portfolio (Asia/Pacific ex Japan) Percentage Weighting Over / Under Model Portfolio (Asia ex Japan) Percentage Weighting Over / Under MSCI
MSCI Benchmark* Benchmark**
Underweight Overweight Underweight Overweight
-10 -5 0 5 10 15 20 -10 -5 0 5 10 15
Telecom (8.9) Banks (16.5)
Banks (18.5) Telecom (11.1)
Info. Tech. (11.3) Info. Tech. (15.3)
Consumer Discretionary (4.8) Utilities (5.3)
Utilities (4.2) Consumer Discretionary (5.6)
Industrials (9.9) Materials (6.7)
Energy (7.8) Real Estate (7.6)
Real Estate (7.3) Other Financials (6.4)
Other Financials (7.6) Consumer Staples (5.4)
Consumer Staples (8.0) Energy (8.4)
Materials (11.7) Industrials (11.7)
* Numbers in brackets show neutral weights within MSCI AC Asia Pacific ex Japan US$ Index as at 16 Jan 2009
** Numbers in brackets show neutral weights within MSCI AC Asia ex Japan US$ Index as at 16 Jan 2009
Consumer Staples includes food & staples retailing, food beverage & tobacco, household products, health care equipment & services, and pharmaceutical &
biotechnology
Industrials include capital goods, commercial services & supplies and transportation
Information Technology includes technology hardware & equipment, semiconductors and semiconductor equipment, software & services
Other Financials include diversified financials and insurance
Source: MSCI, Citi Investment Research and Analysis
2 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Asia-ex Equity Strategy
Better Than Expected ≠ Good
The bull menu contains bigger EPS revisions, better economic numbers and
Markus Rosgen
plenty of liquidity — Earnings revisions have been worse than even during
+852-2501-2752
markus.rosgen@citi.com the Asian crisis but the cuts have been small. Economic numbers have come
out worse than expected for the last 18 months but not for the last two
Elaine Chu months. This has given the market hope that the worst may be behind.
+852-2501-2768 However, better than expected does not mean out of the woods. There is
elaine.chu@citi.com
plenty of excess liquidity due to the collapse of industrial production.
For the sceptics, export prices continue to tumble, EPS forecasts remain too
high and volumes are weak — Export prices are off 4.1% yoy and are
showing a steeper decline than during 1997/98. North Asian export prices
continue to beat those of ASEAN. IBES EPS forecasts continue to suggest
this is the 2 nd shortest and 2nd shallowest recession ever in Asia ex. Export
volumes are now falling faster than input costs. Additionally, the operating
leverage is not in our favour.
At 1.5x P/BV ROE has been between 9.8%-10.7% and is forecast to be 8.4%
— The only way one would pay 1.5x P/BV is if one views this is a shallow and
short downturn and is willing to wait until 2010 to have confirmation of a
9.8%-10.7% ROE. Waiting for 20 months is too long in our view and nor is
our long-term bull indicator turning upwards, suggesting a rally in a bear
market, not a new bull market.
Top Markets: Hong Kong, Korea and Taiwan. Top Sectors: Banks, Telecoms
and Technology
3 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Better than expected ≠ good
While the debate rages on, new bull market or bear rally, corporate life
continues. On the bullish side there have been plenty of downward revisions to
earnings by the IBES consensus. Plenty but not that severe, and IBES forecasts
for 2009 suggest only a -11.5% decline in earnings. If we combine the 2008
and 2009 forecasts then this is still the 2nd shallowest recession in Asia ex, and
incorporating the 2010 forecast it is also the 2nd shallowest.
Economic numbers have been better than Economic numbers over the last two months have begun to come in better than
expected. the economic consensus expected. This is not to say that the numbers were
less bad than the prior month, but that economic consensus was just more
bearish than actual numbers. Prior to the last two months, the economic
consensus had been light on their numbers vs. actual releases. The three point
series we use has a correlation coefficient with the market of 0.76. In our view,
if the economic releases fail to continue to surprise on the upside, we stand a
high probability of the market rolling over again.
Excess liquidity is high because industrial Liquidity, especially excess liquidity over that required by the market, is very
production has collapsed. high. We view this is not so much due to strong money growth but is primarily
related to the collapse in industrial production (money demand). So yes, there
appears to be plenty of liquidity but if earnings don’t come through then the
question is why buy equities? The risk is the expectation gap.
For the bears, export prices continue to For the sceptics, on the menu we have export prices, which continue to fall at a
collapse and at a steeper rate than even rate not seen before, even during the Asian crisis. Asian export prices to the
during 97/98. USA are off by 4.1% on a year-on-year basis, and have fallen by 10% since
peaking in August 2008. Within Asia ex, North Asia is actually outperforming
ASEAN, hence our preference continues to be for North Asia, HK, Korea and
Taiwan over ASEAN.
Export volume is now falling faster than Export volumes are again falling faster than commodity input costs. The
input cost. tailwind of late last year has now become a headwind as the operating leverage
kicks in. This will likely ensure that the current IBES consensus of -11.5%
earnings growth for 2009 will end up being a dream, not a reality.
At 1.5x P/BV the ROE is between 9.8- Valuations, at 1.5x P/BV Asia ex, have historically generated a median ROE of
10.7% and we are currently at 8.4%. One 10.7%. The decline in export prices suggests that the ROE this year will be
needs to believe in the 2010E numbers to closer to 8.4%. To feel comfortable about the 230 bps gap one has to believe
get an ROE between 9.8-10.7%. not only the -11.5% IBES consensus earnings growth forecast for this year but
also the 26.5% rebound in 2010. In other words, buy today for earnings to be
released end 2010! Why should you be sceptical? Based on the IBES
consensus this earnings down-cycle for Asia ex will have been the 2nd shortest
and 2nd shallowest.
Long term bull indicator is still falling Finally, our long-term bull market indicator still hasn’t turned. A back test of
and until it turns it’s a rally in a bear, not the indicator on the US shows that it captured the up-cycle 86% of the time on
a new bull. a 12 month basis, and 100% of the time on an 18 and 24 month basis.
We stick with HK, Korea and Taiwan. Our view remains, own what others don’t and avoid the crowded spots. We are
Sector longs: Banks, telcos and tech. long North Asia over ASEAN. On a regional basis we are long HK, Korea and
Taiwan and are also long the following sectors: Banks, Telecoms and
Technology.
4 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Menu for the bulls vs. Menu for the sceptics
Plenty of earnings revisions, but no big cuts in earnings
Plenty of earnings revisions, but cuts are Figure 1 looks at the earnings revisions for Asia ex (up minus down over total).
small. Bottom line the aggregate earnings The data shows revisions in terms of standard deviations from the mean. Until
still make this a shallow downturn a few weeks ago we had seen the worst levels in terms of earnings revisions
compared to all the prior ones. this side of 1990. But before you rejoice and assume that the analyst pool is on
the right side of the earnings forecast, note that all we measure here is a
revision, not the magnitude. Analysts have spent a lot of time revising down
numbers but each revision was slight. The aggregate earnings forecast for this
year remains at -11.5%, following on from minus 26.1% for 2008.
Figure 1. Plenty of earnings revisions ...
3.0 Earnings Revisions Index, Std. Dev from Mean AxJ
3-m moving avg.
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0 Apr-09 +0.61 s.d. MoM
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: MSCI, IBES, Citi Investment Research and Analysis
On average EPS drops by 50% during What is so wrong with that you may ask? Well, as per Figure 2, comparing this
recessions. Current IBES forecasts put earnings downturn with those seen over the course of the last 30 years shows
the drop at 33.9% and suggest this is the that the current IBES projection would have this current downturn to be the
2nd shortest downturn. second shortest and second shallowest we’ve seen. Is this a case of ‘Crisis what
crisis?’ as IBES forecasts certainly don’t jive with this being the worst economic
downturn this side of WWII. If IBES consensus proves correct and this is but a
shallow downturn, then interest rates are rising faster than the market currently
expects. Therefore, either policy makers are correct and the current situation is
bad (note that we view the numbers show it is bad), or it is not that bad at all
and IBES consensus proves correct. Only one of these can be right.
5 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 2. ...but no big cuts in earnings
AxJ Index Earnings (Peak=100) Consensus
100 fcst
90
80
70
60
50
Apr 82 (66 mths)
40
May 90 (22 mths)
30
Aug 96 (43 mths)
20
Sep 00 (47 mths)
10
Jul 08 (Consensus fcst: 28 mths)
0
0 6 12 18 24 30 36 42 48 54 60 66
No. of mths subsequent to peak earnings
Source: MSCI, IBES, Citi Investment Research and Analysis
Analysts have cut their earnings a significant number of times but only ever so
slightly. The sense of the market is that it has been bombarded with bad news
and to a degree this is true. However, we view the market has taken many
punches but never suffered a body blow i.e. a realistic earnings forecast. If the
average decline in Asian earnings during recessions is 50%, let’s make that the
base case, as things stand the cumulative earnings decline is 33.9%. To get to
a 50% base case, earnings for this year would need to fall by 32.3%. The road
from -11.5% to -32.3% is a long one and as we highlight below, it looks like
things are not getting better on the aggregate corporate front.
Marco numbers better than expected
In the last 18 months numbers came in In Figure 3 we show the trend of economic data releases. A downward sloping
worse than expected. In the last two line means the data has been coming out worse than forecast, upward sloping
months they have been better than implies data coming out better than forecast. We’ve used three variables, CPI,
expected, although this is not the same as industrial production and export growth. Together they have a correlation with
saying better than prior month! the equity market of 0.76. Effectively, the market is driven by whether or not
economic numbers are better/worse than expected. Expectations, rather than
results, are what matters.
6 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 3. Expectations, rather than results, are what matters to equity markets
80 Econ Surprise Indicator 700
(pushed fwd 2 mths) 650
70
MSCI AC Asia ex Japan 600
60
(right scale)
50 550
500
40
450
30
400
20 350
10 300
0 250
-10 200
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Source: Bloomberg, Citi Investment Research and Analysis
Having spent most of the last 18 months being too sanguine vs. actual data
released (hence the economic surprise indicator was trending down), over the
course of the last two months the economic consensus has been too bearish
vs. the actual numbers. Note that the surprise indicator does not make a call
on whether the numbers are better one month vs. the next, but purely
measures whether the numbers are better than the economists were expecting.
As night follows day, forecasters will now try to catch up with the economic
numbers and rather than have a positive surprise, expectations will likely come
in ahead of the ability to deliver. The flash 1Q Singapore GDP numbers were
certainly worse than expected, although the market didn’t appear to pay much
attention to that. While bad numbers are bad it appears that really bad
numbers are really good as it can’t get worse!
Excess liquidity off the charts
Plenty of excess liquidity is due to a Too much money chasing too few goods leads to price increases. This is what
collapse in industrial production, not a is potentially happening to equity markets. Figure 4 looks at the excess supply
huge rise in money supply. of money over demand for money. A demand for money proxy is industrial
production. Up until the last few months excess liquidity was falling as were the
equity markets. Very recently, the excess liquidity indicator has shot up. Why?
In our view it is not due to a huge build up of liquidity, but instead is due to the
collapse in industrial production. The economy needs less capital to grow but
the liquidity is still there. Liquidity then finds so called “unproductive” assets in
which to invest in, i.e. real estate and/or stock markets.
7 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 4. Too much money chasing too few goods leads to price increases
20 Asian Domestic Excess Liquidity (%YoY, left scale) 140
MSCI AC Asia ex-Jp US$ Index 12-m % Chg, right scale 120
15
100
10 80
60
5 40
0 20
0
-5 -20
-40
-10
r=0.3 -60
-15 -80
84 86 88 90 92 94 96 98 00 02 04 06 08
Source: CEIC, MSCI, Citi Investment Research and Analysis
In the near-term all of this is well and good, and markets go up, but there is
always the risk of the expectation gap. Equities are bought ultimately for future
earnings streams and if these don’t materialise as fast, and in as large quantity
as expected, disappointment will set in. As we see from the consensus
numbers, it’s not as if the IBES consensus is taking a particularly bearish
stance on the outlook for earnings. The risk to further earnings downgrades
remains substantial in our view.
The corporate picture-pricing powerless
Asian export prices lead ROE. Export What is going on with export prices? Export prices for Asian products appear to
prices are falling by 4% yoy, suggesting be falling off a cliff, a situation not seen in Asia ex since the data became
an ROE of 8.4% for 2009E. Export prices available in late 1993. At present, export prices are falling faster than even
are falling faster than during 1997/98. during the 1997/98 Asian crisis or during the 2001 recession. The print for
March was a decline in export prices of 4.1% on a year-on year basis (see Figure
5). Since the peak in August 2008, export prices have come off by 10%. Clearly,
this has been great for the global consumer but less so for the shareholders of
Asian corporates. How bad could export prices get? Back in 1997/98, Asian
export prices fell by 9.6%. In other words, we view it can easily get worse from
here without having to make a leap into the unknown that ‘this time it will be
different’. If export prices fall by 9.6%, i.e. the same amount as during 1997/98,
then the ROE could be heading for 2.5%, well below current expectations.
8 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 5. Current decline in export prices implies an ROE of 8.4%. If export prices fall by the same
amount as during 1997/98, ROE could be heading for 2.5%.
8 MSCI Far East ex Japan Trailing ROE (%, right scale) 16
6 14
4 Implied 12
2 ROE
0 10
-2 8
-4 6
-6 R-sq = 0.78 U.S. Import prices from Asian newly 4
-8 industrialized countries, (%YoY,
-10 2
pushed fwd. 6 mths, left scale)
-12 0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: CEIC, MSCI, Citi Investment Research and Analysis estimate
ROE trough during the 1975 and 1983 As things stand (Figure 5) the current decline in export prices implies an ROE
recessions was 7.9% and 8.1% of 8.4%, not that dissimilar to the ROE seen at the bottom of the last two major
respectively. Trough P/BV was 0.9x, recessions, 1975 (7.9%) and 1983 (8.1%). Yet at the bottom of these two
current P/BV is 1.5x. recessions, P/BV stood at 0.9x, a number we’ve not yet seen in Asia ex. The
current P/BV multiple stands at 1.5x, and the lowest thus far in the Asian cycle
has been 1.1x. While we keep getting told by policy makers (as shown by their
actions) that this downturn is worse than the one seen in 1975 or 1982/3, the
market clearly has a different view.
Export prices for North Asia are bad but are worse for ASEAN
North Asian export prices are Figure 6 highlights the north south split in terms of Asian export prices.
outperforming those of ASEAN. Pricing ASEAN export prices peaked ahead of those of North Asia in mid 2008. Since
power is bad region wide but less so in then ASEAN export prices have fallen faster and further than those of North
North Asia. Asia. The main causes are that commodity prices (ASEAN has a higher
commodity weight in its export basket) have fared worse than the export basket
of North Asia but also the level of value add of the ASEAN export basket is
lower than that of North Asia. As such, pricing power has been weaker in
ASEAN than North Asia, hence a worse performance of ASEAN export prices.
9 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 6. Export prices for North Asia are bad but worse for ASEAN
8 %YoY U.S. import price growth, China
6 Asian newly industrialized economies
(HK, Korea, Taiwan, Singapore)
4
ASEAN
2
0
-2
-4
-6
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Source: CEIC, Citi Investment Research and Analysis
ASEAN region remains well held and less The underperformance of ASEAN export prices does not appear to have put
pricing power will likely lead to further investors off owning the region. As shown in Figure 7 (from Elaine Chu’s ‘Fun
earnings disappointments especially vs. with Flows’ report), the ASEAN region continues to be well held by the Asian
North Asia. investors with Singapore the biggest single overweight, followed by Thailand
and Indonesia. The split continues to be more ASEAN than North Asia with
Korea and Taiwan the biggest underweights by the consensus.
Figure 7. The ASEAN region continues to be well held by the Asian investors
Above/below MSCI AC AxJ (bps) previous month
200 latest month
100
0
-100
-200
-300
-400
SG CH TH HK Indo. PH India MY TW KR
Latest month as February
Source: EPFR Global, MSCI, Citi Investment Research and Analysis
As long as ASEAN export prices continue to fall at the current rate, it is hard to
see a significant earnings recovery for the region or to believe that earnings in
ASEAN will outperform those of North Asia. This is why, for the time being, our
bias continues to be for North Asian markets over the ASEAN markets.
10 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Export volume continues to fall faster than commodity input costs
Last year Asian corporates got a tailwind, Corporate profit margins actually got a tailwind late last year. Commodity costs
as input costs came off faster than the were declining faster than export growth rates. Yes, the decline in the top line
top line declined, but this is not the case was painful but the pain was mitigated by the sharper fall in one of the
anymore. components of input costs. That tailwind has now become a headwind as
commodity prices have stopped declining at a faster rate than the top line. As
things stand, export growth is falling faster than commodity input costs (Figure
8). Given the generally higher operating leverage in Asia ex vs. developed
markets this is likely to hurt the relative level of profitability quite significantly
and hence earnings growth. Although analysts have been busy adjusting their
numbers, we view the courage to make significant cuts remains absent. As we
highlighted earlier, we believe the risk to earnings in Asia remains to the
downside unless this turns out to be just a mild downturn.
Figure 8. Export growth is falling faster than commodity input costs
1.8 (Base date: Jan 2000)
1.7
Asia ex Japan Total Exports/ S&P GSCI
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
00 01 02 03 04 05 06 07 08 09
Source: CEIC, Bloomberg, Citi Investment Research and Analysis
Saving has become fashionable again, not One of the reasons why exports continue to be weak is a new found desire on
exactly supportive of the Asian export the part of Anglo-Saxon consumers to reacquaint themselves with the art of
model. saving, which clearly has implications for demand. Figure 9 highlights what has
happened to the US savings rate over the last 50 years. Recently it has risen
and now stands at 4.2%. The post war average rate is 6.8% and the savings
rate until 1981, stood at 8.9%. It is conceivable that the US savings rate rises
to somewhere between those two numbers (the bears will say it goes higher). If
that is so, it is highly unlikely that Asian export growth comes back with a
vengeance. If volumes don’t come back then nor will the pricing. While this
may not be what we want to hear, the balance of probabilities suggests savings
rates are going up, not down.
11 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 9. U.S. savings rate has risen and now stands at 4.2%. The post war average rate is 6.8% and
the savings rate until 1981, stood at 8.9%
16.0 Personal Saving Rate (SAAR, %)
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Source: BEA, Haver Analytics
Price you pay vs. what you get
At 1.5x PBV, ROE has historically been Asia ex is now trading on a 1.5x price to book multiple. Each time we’ve seen a
between 9.8-10.7%. ROE for this year is 1.5x P/BV the ROE has averaged 9.8%, and the median ROE has been 10.7%.
forecast at 8.4%. Buy now if you believe Interest rates/inflation have had almost no impact on the rate of ROE. Based on
in the 2010 forecasts but that’s 20 the export price data series, ROE this year will be 8.4%. ROE in Asia ex since
months away. 1975 has ranged from a low of 0.9% (Asian crisis) to a high in the early 1980’s
of 16.6%. Excluding the two outliers gives a range of 7.5% to 14.5%.
So, 1.5x P/BV has historically given you an ROE of 9.8% vs. a current forecast
of 8.4%, a 140 bps gap. Paying up 1.5x P/BV only makes sense if you believe
the 2010E IBES forecast of plus 26.5%. Why? Well, 8.4% ROE as per the
import price data, plus 26.5% IBES EPS growth (we did not assume an
increase to book) implies an ROE of 10.6%, i.e. the median ROE whenever the
P/BV has been at 1.5x. Thus paying 1.5x P/BV makes sense if the market i.e.
investors, are willing to pay today for earnings to be delivered in 20 months
time. As we all know, we have greater clarity as to what will happen next month
than in 20 months time. In our view it has never proven to be prudent to chase
a market which is pricing itself off earnings 20 months away.
Long-term bull indicator still hasn’t turned
The long term bull market indicator Our long-term bull market indicator still hasn’t turned (Figure 10). While by
continues to fall. Until it turns we view virtue of it’s make up it will never lead, when it turns it has a very high hit rate.
this is a rally in a bear and not a new bull Having back tested it on the US since 1900, it has captured 86% of the
market. upswings on a 12 month view, and 100% on an 18 and 24 month view. Sadly,
it is still falling and until this changes it remains a rally in the confines of a bear
market and does not yet signal the beginning of the next bull market. We
remain long the out-of-consensus markets of Korea and Taiwan and out-of-
consensus sectors of Banks and Technology.
12 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 10. The long term bull market indicator continues to fall
800 MSCI AC ASIA EX JP U$ - PRICE INDEX
CIRA Long-term Indicator, right scale 140
700 210-d MA 120
100
600 80
60
500 40
20
400 0
-20
300 -40
-60
200 -80
-100
100 -120
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Citi Investment Research and Analysis
Near-term markets are very overbought
Figure 11 highlights the percentage of stocks which are above or below their
50-day or 200-day moving average. The thin line highlights the 50-day moving
average series. This has gone from most stocks trading below their 50-day
moving average in a decade at the end of October 2008, to the highest
percentage of stocks trading above their 50-day moving average (88% of all
stocks) currently. Even looking at the 200-day, there are now equal number of
stocks above/below their 200-day moving average. Based on the 50-day
moving average indicator, it is the fastest recovery we’ve ever seen, a turbo
charged V-shape!
Figure 11. Near-term markets are very overbought
100% %Above-%Below 200D MA (4W MA)
%Above-%Below 50D MA (4W MA)
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Source: FactSet, Citi Investment Research and Analysis
13 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Asia Pacific Model Portfolio by Country
Price YTD Analyst's MSCI Portfolio FY09E FY09E EPS FY09E Div FY09E FY09E
Name 17 Apr 09 Perf (%) Ticker Rating Wght (%) Wght (%) PE (x) Gwth (%) Yield (%) P/BV (x) ROE (%)
Australia/New Zealand (-46 bps Underweight) 27.5 27.0
Aust & NZ Banking 16.7 9.2 ANZ.AX 2M 6.0 12.4 -9.6 6.1 1.3 10.3
Brambles 5.9 -21.2 BXB.AX 2M 5.0 15.6 -38.6 5.5 3.6 23.2
Tabcorp Hld 7.1 2.1 TAH.AX 2M 1.0 8.0 -13.8 9.8 1.3 16.3
Telecom NZ 2.5 10.9 TEL.NZ 2M 5.0 11.2 -32.5 9.4 1.7 15.1
Telstra 3.2 -16.7 TLS.AX 2H 8.0 10.4 3.0 8.8 3.0 28.6
Woodside Pet 38.1 3.8 WPL.AX 1M 2.0 19.3 -35.1 2.8 3.3 17.1
China (-1340 bps Underweight) 18.4 5.0
China Mobile 74.0 -4.9 0941.HK 1L 3.0 11.5 2.5 3.9 2.7 23.2
CNOOC 9.2 27.1 0883.HK 1L 2.0 17.8 -54.0 2.3 2.1 11.8
Hong Kong (+538 bps Overweight) 9.6 15.0
BOC Hong Kong 10.5 19.6 2388.HK 2L 4.0 13.4 148.1 4.5 1.4 10.1
Guoco 47.9 5.4 0053.HK 1L 1.0 -4.8 -536.5 4.2 0.4 -8.7
HSBC 4.9 -26.7 HSBA.L 1M 2.0 19.0 15.0 4.7 1.0 5.3
Hong Kong & China Gas 13.5 15.7 0003.HK 3L 2.0 21.6 -7.2 2.6 2.8 12.9
Henderson Land 35.7 24.4 0012.HK 1H 2.0 17.6 -27.2 3.1 0.6 3.5
Hutchison Whampoa 43.0 10.6 0013.HK 1L 4.0 16.4 -37.0 4.0 0.6 3.7
India (-300 bps Underweight) 7.0 4.0
Bharti Airtel 678.4 -5.1 BRTI.BO 1L 1.0 13.6 17.9 - 3.2 23.8
State Bank of India 1,306.4 1.4 SBI.BO 1L 1.0 8.7 4.8 1.7 1.3 14.8
Wipro 274.3 17.4 WIPR.BO 2H 2.0 10.6 7.6 2.9 2.4 22.4
Indonesia (-59 bps Underweight) 1.6 1.0
PT Telkom 7,750.0 12.3 TLKM.JK 2L 1.0 13.8 -4.1 5.1 4.0 29.3
Korea (+473 bps Overweight) 14.3 19.0
KEPCO 25,700.0 -13.2 015760.KS 2L 1.0 -12.1 55.9 - 0.4 -3.5
KB Financial 37,000.0 9.8 105560.KS 2H 4.0 8.6 -25.1 1.1 0.7 7.8
Samsung Elec 597,000.0 32.4 005930.KS 1L 7.0 16.6 -4.4 0.9 1.5 8.8
Shinhan Financial 28,750.0 1.8 055550.KS 1H 4.0 8.1 -23.3 1.0 0.9 11.2
Shinsegae 442,500.0 -8.2 004170.KS 3L 3.0 14.7 -1.1 0.3 1.9 12.9
Malaysia (+263 bps Overweight) 3.4 6.0
DiGi.com 22.0 0.9 DSOM.KL 3L 3.0 16.4 -9.7 5.2 8.2 50.0
Public Bank 8.5 -1.2 PUBM.KL 3L 2.0 16.3 -32.4 4.2 2.9 18.0
Tanjong 14.2 6.8 TJPL.KL 1L 1.0 9.2 34.8 7.0 1.6 17.2
Philippines (-59 bps Underweight) 0.6 0.0
Singapore (-104 bps Underweight) 5.0 4.0
DBS 9.3 10.7 DBSM.SI 1L 1.5 12.3 -31.4 5.8 0.9 7.1
StarHub 2.0 4.6 STAR.SI 1L 1.5 11.1 4.0 8.9 30.7 276.6
SPH 2.9 -7.1 SPRM.SI 1L 1.0 14.3 -30.8 10.4 2.2 15.6
Taiwan (+679 bps Overweight) 11.2 18.0
Acer 58.6 37.6 2353.TW 1M 1.0 12.2 7.8 4.5 1.7 14.2
Chinatrust 15.4 10.4 2891.TW 1M 2.0 23.8 -60.6 1.3 1.1 4.8
Far Eastone 36.1 -3.2 4904.TW 2L 3.0 10.7 6.5 8.6 1.7 15.7
Formosa Plastics 56.1 28.7 1301.TW 2L 2.0 16.1 -5.6 4.6 1.7 10.7
Taishin 7.5 29.8 2887.TW 3H 1.0 34.8 124.8 1.1 0.7 1.9
Taiwan Mobile 49.8 2.2 3045.TW 1L 3.0 12.3 -6.6 6.8 3.7 30.0
TSMC 50.4 13.5 2330.TW 1L 6.0 50.6 -74.4 5.0 2.6 5.2
Thailand (-46 bps Underweight) 1.5 1.0
Kasikornbank 50.0 11.1 KBANf.BK 1L 1.0 8.2 -5.2 4.0 1.0 11.9
Total 100.0 100.0 14.2 -18.2 4.6 1.4 10.2
Neutral weight as of 16 Jan 2009
Source: Citi Investment Research and Analysis estimates
14 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Asia Pacific Model Portfolio by Sector
Price YTD MSCI Portfolio FY09E FY09E EPS FY09E Div FY09E FY09E
Name 17 Apr 09 Perf (%) Country Wght (%) Wght (%) PE (x) Gwth (%) Yield (%) P/BV (x) ROE (%)
Banks (+1002 bps Overweight) 18.5 28.5
Aust & NZ Banking 16.7 9.2 AU 6.0 12.4 -9.6 6.1 1.3 10.3
BOC Hong Kong 10.5 19.6 HK 4.0 13.4 148.1 4.5 1.4 10.1
Chinatrust 15.4 10.4 TW 2.0 23.8 -60.6 1.3 1.1 4.8
DBS 9.3 10.7 SG 1.5 12.3 -31.4 5.8 0.9 7.1
HSBC 4.9 -26.7 GB 2.0 19.0 15.0 4.7 1.0 5.3
Kasikornbank 50.0 11.1 TH 1.0 8.2 -5.2 4.0 1.0 11.9
KB Financial 37,000.0 9.8 KR 4.0 8.6 -25.1 1.1 0.7 7.8
Public Bank 8.5 -1.2 MY 2.0 16.3 -32.4 4.2 2.9 18.0
Shinhan Financial 28,750.0 1.8 KR 4.0 8.1 -23.3 1.0 0.9 11.2
State Bank of India 1,306.4 1.4 IN 1.0 8.7 4.8 1.7 1.3 14.8
Taishin 7.5 29.8 TW 1.0 34.8 124.8 1.1 0.7 1.9
Consumer Discre. (+22 bps Overweight) 4.8 5.0
Shinsegae 442,500.0 -8.2 KR 3.0 14.7 -1.1 0.3 1.9 12.9
SPH 2.9 -7.1 SG 1.0 14.3 -30.8 10.4 2.2 15.6
Tabcorp Hld 7.1 2.1 AU 1.0 8.0 -13.8 9.8 1.3 16.3
Consumer Staples (-802 bps Underweight) 8.0 0.0
Energy (-381 bps Underweight) 7.8 4.0
CNOOC 9.2 27.1 HK 2.0 17.8 -54.0 2.3 2.1 11.8
Woodside Pet 38.1 3.8 AU 2.0 19.3 -35.1 2.8 3.3 17.1
Financials , Others (-656 bps Underweight) 7.6 1.0
Guoco 47.9 5.4 HK 1.0 -4.8 -536.5 4.2 0.4 -8.7
Industrials (-94 bps Underweight) 9.9 9.0
Brambles 5.9 -21.2 AU 5.0 15.6 -38.6 5.5 3.6 23.2
Hutchison Whampoa 43.0 10.6 HK 4.0 16.4 -37.0 4.0 0.6 3.7
Information Technology (+472 bps Overweight) 11.3 16.0
Acer 58.6 37.6 TW 1.0 12.2 7.8 4.5 1.7 14.2
Samsung Elec 597,000.0 32.4 KR 7.0 16.6 -4.4 0.9 1.5 8.8
Wipro 274.3 17.4 IN 2.0 10.6 7.6 2.9 2.4 22.4
TSMC 50.4 13.5 TW 6.0 50.6 -74.4 5.0 2.6 5.2
Materials (-970 bps Underweight) 11.7 2.0
Formosa Plastics 56.1 28.7 TW 2.0 16.1 -5.6 4.6 1.7 10.7
Real Estate (-535 bps Underweight) 7.3 2.0
Henderson Land 35.7 24.4 HK 2.0 17.6 -27.2 3.1 0.6 3.5
Telecommunications (+1962 bps Overweight) 8.9 28.5
Bharti Airtel 678.4 -5.1 IN 1.0 13.6 17.9 0.0 3.2 23.8
China Mobile 74.0 -4.9 HK 3.0 11.5 2.5 3.9 2.7 23.2
DiGi.com 22.0 0.9 MY 3.0 16.4 -9.7 5.2 8.2 50.0
Far Eastone 36.1 -3.2 TW 3.0 10.7 6.5 8.6 1.7 15.7
PT Telkom 7,750.0 12.3 ID 1.0 13.8 -4.1 5.1 4.0 29.3
StarHub 2.0 4.6 SG 1.5 11.1 4.0 8.9 30.7 276.6
Taiwan Mobile 49.8 2.2 TW 3.0 12.3 -6.6 6.8 3.7 30.0
Telecom NZ 2.5 10.9 NZ 5.0 11.2 -32.5 9.4 1.7 15.1
Telstra 3.2 -16.7 AU 8.0 10.4 3.0 8.8 3.0 28.6
Utilities (-19 bps Underweight) 4.2 4.0
Hong Kong & China Gas 13.5 15.7 HK 2.0 21.6 -7.2 2.6 2.8 12.9
KEPCO 25,700.0 -13.2 KR 1.0 -12.1 55.9 0.0 0.4 -3.5
Tanjong 14.2 6.8 MY 1.0 9.2 34.8 7.0 1.6 17.2
Total 100.0 100.0 14.2 -18.2 4.6 1.4 10.2
Neutral weight as of 16 Jan 2009
Source: Citi Investment Research and Analysis estimates
15 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Japan Equity Strategy
Signs of an environmental bubble—Shades of IT bubble of
Tsutomu Fujita, CFA
+81-3-6270-4885 decade ago
tsutomu.fujita@nikkociti.com
Bubbles follow crises — In some ways we think the current environment bears a
certain resemblance to that of 1990-2000, when the IT bubble emerged. The
global economic upheaval is larger now than it was then, and the monetary
easing and fiscal mobilization in response have been much more dramatic. Still,
just as the IT bubble emerged after the LTCM crisis in the US and financial
crises in Russia and Asia, we think the current economic crisis might be
followed by an environment-related bubble.
Real gains in H2 — The Clinton administration’s information superhighway
concept played a leading role in inflating the IT bubble. This time around, we
see potential for Japanese equities to surge by more than expected against a
backdrop of the largest fiscal stimulus in Japanese history, yen weakness, and
a Chinese economic recovery, only this time with the lead role played by
environmental issues.
COP15 to be held in December — Targets for international global warming
countermeasures for 2013 and beyond will be set and at the same time
worldwide reduction targets for greenhouse gases for 2020 are due to be
decided. We think the US, China, and India could recognize emission reduction
obligations.
Obama administration focused on environment — The administration is aiming
to cut greenhouse gases to 80% of the 1990 level by 2050. This will require
groundbreaking environment technologies and related investment. We expect
the environment to become a major investment theme comparable to IT a
decade ago.
Signs of an environment bubble — Reflecting increases in environment-related
public works investment, environment plays are surging around the world.
Recently solar cell plays have been soaring on the merest scrap of newsflow.
We highlight companies with impressive competitiveness not just in the
environment arena but in other fields as well.
Environment plays — We highlight the following companies as environmentally
friendly plays: automotive (Honda, Suzuki, GS Yuasa), solar cells (Kyocera,
Sharp), housing (Daiwa House Industry, Sekisui House), smart grids (Sumitomo
Electric), consumer electronics (Yamada Denki), and cement makers (Taiheiyo
Cement, Mitsubishi Materials).
16 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Situation resembles IT bubble of decade ago
Shares set for real gains in H2
Bubbles come on heels of crises In some ways we think the current environment bears a certain resemblance to
that of 1990-2000, when the IT bubble emerged. The global economic
upheaval is larger now than it was then, and the monetary easing and fiscal
mobilization in response have been much more dramatic. Still, just as the IT
bubble emerged after the LTCM crisis in the US and financial crises in Russia
and Asia, we think the current economic crisis might be followed by an
environment-related bubble.
We see a growing chance of a greater than expected surge in Japanese equities
in H2, for the following reasons.
1. The government has committed a total of ¥27trn in fiscal spending on
stimulus measures since the start of the Aso administration.
We think the fiscal spending, which exceed 5% of GDP, will almost entirely
take place before the end of the year. We therefore expect the Japanese
economy to get back on a visible recovery track in the second half of the year.
2. The government plans to set up a new equity purchasing institution to
purchase up to ¥50trn in shares.
The BSPC can acquire up to ¥20trn in shares, so the total scale of the
purchases is set to be around ¥70trn. This means that the two organizations
combined will be able to buy some 20-30% of Japanese equity market cap,
so we think downside risk for share prices has receded significantly.
3. Signs are emerging of a recovery in the Chinese and global economies
We forecast a Chinese GDP growth rate of 7.6% in 2009. We also forecast
high growth rates for domestic final demand (11.3%) and gross fixed
capital formation (13.2%). The IMF expects China to have a global GDP
weighting of 7.4% in 2009, close to Japan's 7.5%, so we think Japan will
reap considerable benefits.
4. The yen has been weakening markedly against the world's major
currencies.
In almost all of the fundamental metrics, such as GDP growth rates,
interest rate levels, trade balances, and cumulative public debt, the
indicators are increasingly suggesting that the yen should be weak. This
would be of great benefit to export industries such as autos, electronics,
and machinery. The yen has weakened from ¥87 to the dollar in December
2008 to ¥101 and it has weakened from ¥112 to the euro in January 2009
to ¥135.
However, we see the risk that the equity market will fall back in 2010 and
beyond on 1) a reaction from the huge fiscal stimulus of 2009 and 2) rising
long-term interest rates around the world caused by expanded fiscal deficits
and economic recovery.
17 Citigroup Global MarketsThe Asia Investigator
21 April 2009
In our April 13 memo “Obuchi and Aso administrations compared” we
explained how the global economic environment and the Japanese political
situation in 1998-2000 were relatively close to those of today. Just as a
refresher, let us look again at the points of similarity.
1. In 1997 and 1998, the Asian currency crisis, the South Korean crisis, the
Russia crises, and the LTCM crisis in the US all occurred, with the world as
a whole experiencing a financial crisis. Bold monetary easing went into
effect around the world.
2. Japan went through its worst post-war recession, with 1998 GDP
contracting 2.0%. The Obuchi administration, which came to office
following the big defeat for the LDP in the Upper House election in 1998,
put together what was then the biggest pork-barrel fiscal spending package
in Japanese history ahead of the Lower House election.
3. Yamaichi Securities, the Nippon Credit Bank, and the Long-term Credit
Bank of Japan went under and the major banks received injections of
public funds. Banks are currently collapsing in Europe and the US and
receiving similar injections of public funds.
As Figure 1 shows, the 1998 GDP contraction of 2.0% was worse than the
0.6% contraction of 2008. Of course the current deterioration in the economy
is more serious, but we think that unease about Japan's financial system was
much greater back then.
Figure 1. Top 10 low growth and no-growth years for global economy and Japan since 1970
Global (%） Japan (%）
1 1982 0.9 1998 -2.0
2 1975 1.2 2008 -0.6
3 1991 1.5 1974 -0.1
4 1980 2.0 1999 -0.1
5 1993 2.0 2001 0.2
6 1992 2.0 2002 0.3
7 1981 2.2 1980 1.1
8 1974 2.2 1993 1.2
9 2001 2.2 2003 1.4
10 1998 2.5 1981 1.5
Note: Figures for Japan for 1994 and before are based on the old calculation standards.
Source: Datastream, International Monetary Fund, Cabinet Office, Nikko Citigroup Limited.
Bubbles follow crises
Too late and too much … Topix fell to what was then a post-Bubble low of 980 in October 1998 but
rallied 79% in just 17 months to reach what was then a post-Bubble high of
1,754 in February 2000. This came against the following backdrop.
1. Major monetary easing and then delayed tightening in response to the
global economic crisis of 1998
2. An IT revolution was occurring, in which the lead role was played by the
information superhighway concept of the Clinton administration. At the
same time, Japanese firms boasted commanding international
competitiveness at the time in some of the products that were shaping the
IT revolution, including mobile telecoms and electronic components.
18 Citigroup Global MarketsThe Asia Investigator
21 April 2009
3. More monetary loosening and IT investment than necessary was
undertaken to respond to the Y2K problem
Bubbles often follow crises; the IT bubble of 2000 is not an isolated example.
For details of the history of bubbles, please see our July 3, 2008 report,
“Testing the 2010 bubble theory”.
Japan's biggest bubble was the “Remodel the Japanese Archipelago” boom of
1972. In 1972 alone, Topix soared 101%.
Figure 2. Top 10 years for Topix and S&P 500
S&P 500 TOPIX
1 1954 45.0% 1972 101.4%
2 1933 44.1% 1952 96.9%
3 1935 41.4% 1999 58.4%
4 1958 38.1% 1986 48.3%
5 1995 34.1% 1951 46.4%
6 1975 31.5% 2005 43.5%
7 1997 31.0% 1958 40.4%
8 1945 30.7% 1988 36.6%
9 1936 27.9% 1969 36.5%
10 1989 27.3% 1960 36.5%
Note: Since 1932 for the S&P 500 and since 1950 for TOPIX.
Source: Bloomberg, Nikko Citigroup Limited.
The 1972 bubble was caused by monetary easing in response to the sharp
appreciation of the yen accompanying the 1971 "Nixon shock", whereby the fixed
exchange rate system that had pegged the yen to the dollar at ¥360 collapsed.
We think the first and second oil shocks of 1973 and 1979 caused the longest
and biggest run-up in shares in Japanese history, which lasted from October
1982 to 1989. The bubble from 1986 to 1989 was heavily affected by yen
strength resulting from the 1985 Plaza Accord and the monetary easing
resulting from Black Monday in 1987.
From 2003 to 2007, bubbles inflated in diverse fields around the world: not
only was there a US housing bubble, there was also a resource bubble, an
energy bubble, a sovereign wealth fund bubble, a hedge fund bubble, an M&A
bubble, a cheap-yen bubble, and a euro bubble. We think the main cause was
excessive monetary easing in response to the events of 9/11 in 2001, the Enron
scandal and the Afghan War in 2002, and the Iraq War in 2003.
19 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 3. Topix and MSCI World Equity Index
700
2,600
MSCI World Index (LHS)
600
TOPIX (RHS)
2,100
500
1,600 400
300
1,100
200
600
100
100 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Note: End-1979 = 100
Source: MSCI Barra, Nikko Citigroup Limited.
The pattern of the current crisis is different in that policy response has been
slow. If governments and central banks are slow to take action, the measures
that are eventually unveiled tend to be excessive. In particular, monetary
easing tends to come too late as many of the indicators that governments focus
on are lagging indicators (employment, inflation, etc.). In short, policy
response is slow and excessive.
Background to the environmental bubble
Signs of an environmental bubble Given the size of the current crisis, it is possible that the response will inflate
an investment bubble. In this case, we expect the environment to be a major
theme for the reasons outlined below.
1. US presidential measures have large impact on global equities
President Clinton’s information superhighway concept and President Bush’s
national energy plans were major boons for IT and energy stocks. President
Obama has made the environment a centrepiece of his administration’s plans
and aims to reduce greenhouse gas emissions by 80% versus the 1990 level by
2050. This will require revolutionary environmental technologies and related
investment.
20 Citigroup Global MarketsThe Asia Investigator
21 April 2009
Figure 4. S&P US IT and energy indices (relative to US)
350 230
IT (LHS) 210
300 Energy (RHS)
190
250 170
150
200
130
150 110
90
100
70
50 50
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: S&P Global Equity Indices, Nikko Citigroup Limited.
2. Follow up to Kyoto Protocol
The next United Nation Framework Convention on Climate Change will be held
in Copenhagen in December 2009 (COP15). We expect dramatic changes to
global environmental measures.
First, we expect agreement on global warming countermeasures from 2013
onward and greenhouse gas reduction targets for 2020. Second, we think the
US, China, and India, which together account for around 46% of global
greenhouse gas emissions, are likely to ratify the greenhouse gas reduction
obligations contained in the Kyoto Protocol.
Figure 5. Composition of greenhouse gas emission by country (2005)
Emission (mn tons - CO2 ) Weight
US 5,863 22.0%
China 5,082 19.0%
Russia 1,551 5.8%
Japan 1,250 4.7%
India 1,192 4.5%
Germany 814 3.0%
UK 576 2.2%
Canada 532 2.0%
Italy 451 1.7%
South Korea 447 1.7%
Mexico 433 1.6%
France 392 1.5%
Australia 374 1.4%
Others 7,737 29.0%
Total 26,693 100.0%
Source: EDMC Handbook of Energy and Economic Statistics in Japan 2008, Nikko Citigroup Limited.
21 Citigroup Global MarketsThe Asia Investigator
21 April 2009
3. Environment-related spending by governments to increase sharply
We think governments around the world will increase investment in
environment-related projects as part of their response to the global economic
downturn, with spending centering on solar power, wind power, nuclear power,
and high-speed rail networks.
Environmental bubble and investment
strategy
Recommending environment-related We already see signs of an environmental bubble emerging in equity markets,
names driven mainly by solar power and electric cars.
Recently, equity markets have been sensitive to environment-related news. For
example, Itochu’s share price soared on the announcement it had acquired
stakes in US home solar power system makers while Showa Shell rose on news
that it was in talks to acquire Hitachi Plasma Display’s Miyazaki plant. Kuraray,
Nisshinbo Holdings, and Tokyo Electron are among other environment-related
names that have recorded sharp gains.
During the IT bubble 10 years ago, we believe many investors piled in only half
convinced of the investment story. However, history has shown anomalies in
equity markets every 10 years or so. In February 2000, at the peak of the IT
bubble, Softbank had a larger market cap than Toyota, and Hikari Tsushin had
a larger market cap than Canon.
Figure 6. Top 10 Japanese companies by market cap (end-February 2000)
Company Market-cap (¥mn) TSE weight
1 NTT DoCoMo 43,283,520 9.4%
2 NTT 24,429,020 5.3%
3 Softbank 18,140,265 3.9%
4 Toyota Motor 16,933,923 3.7%
5 Sony 13,942,219 3.0%
6 Seven-Eleven Japan 10,052,970 2.2%
7 Oracle 7,600,910 1.7%
8 Fujitsu 7,095,084 1.5%
9 Hikari Tsushin 6,722,009 1.5%
10 Bank of Tokyo-Mitsubishi 6,431,268 1.4%
Source: Tokyo Stock Exchange, Nikkei Needs, Nikko Citigroup Limited.
Softbank’s market cap peaked at ¥18.1trn (3.9% of TSE market value at the
time) and Hikari Tsushin’s at ¥6.7trn (1.5%); together they accounted for a
whopping 5.4% of TSE value. Not holding these shares was a risk for fund
managers.
Will this situation be repeated for environment-related names? We think many
investors are doubtful about upside prospects for the market as a whole, but
for the reason outlined above we believe there will be drastic change in the
investment trends witnessed through 2008.
22 Citigroup Global MarketsThe Asia Investigator
21 April 2009
We expect the environment to be a major investment theme in the run up to
COP15 in December. Past experience shows that investors who get on the wave
early are best placed to exit first. We recommend the following companies
because, in addition to having environmental strengths in the areas mentioned
below, they are competitive in other fields and enjoy strong fundamentals.
Green cars Honda, Suzuki, GS Yuasa
Solar power Kyocera, Sharp
Housing-related equipment Daiwa House, Sekisui House
Smart grids Sumitomo Electric Industries
Consumer electronics Yamada Denki
Cement Taiheiyo Cement, Mitsubishi materials
Figure 7. Japan – Recommended stocks
Share price (¥) Owners equity ratio (%) RP YoY (%) PER (x) Pct to chg vs. TOPIX (%)
Code 15-Apr-09 (End-2008) FY3/08E FY3/09E FY3/08E FY3/09E 12 months 3 months 1 month
Daiwa House Industry 1925.JP 884 33.1 -42.9 57.1 96.1 18.9 28.2 4.5 12.2
Sekisui House 1928.JP 828 54.3 -53.9 69.0 32.0 18.7 35.5 7.2 12.4
Taiheiyo Cement 5233.JP 180 17.4 NM NM NM NM 14.7 17.5 12.3
Mitsubishi Materials 5711.JP 301 21.4 -70.6 -56.3 376.3 47.8 -7.8 30.4 14.5
Sumitomo Electric Industries 5802.JP 935 44.7 -79.4 NM 74.2 NM 17.6 25.5 6.5
GS Yuasa 6674.JP 573 27.6 26.9 -33.3 52.6 78.5 198.1 10.8 22.1
Sharp 6753.JP 907 39.0 NM NM NM NM -20.6 19.6 5.6
Kyocera 6971.JP 6,570 75.1 -77.1 -50.0 62.9 104.8 17.5 2.3 -9.9
Honda 7267.JP 2,725 35.4 -84.9 -95.6 62.5 62.5 45.0 39.5 6.4
Suzuki 7269.JP 1,798 32.2 -54.1 -18.1 44.4 51.4 9.0 42.7 -7.2
Yamada Denki 9831.JP 4,520 38.5 -7.5 1.3 11.1 9.5 -20.1 -15.4 18.8
Note: Forecasts by Toyo Keizai. NM: Not material.
Source: Toyo Keizai, Nikkei AMSUS, company data, Nikko Citigroup Limited.
23 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Singapore Equity Strategy
Out of Recession by 4Q 2009, 12-month STI Target 2400
Hak Bin Chua
+65-6432-1168 Worst is over – 1Q GDP contraction of –11.5% is likely to be the worst. We
hak.bin.chua@citi.com
expect a smaller rate of contraction in 2Q (-8.2%) and 3Q (-6.2%), with
Ivan K Lim good chance of positive GDP growth in 4Q09 (+0.3%) and 1Q 2010
ivan.lim@citi.com
(+6.7%). We believe the recession will be over by the fourth quarter.
Chun Keong Tan Aggressive global fiscal and monetary easing, coupled with Singapore
chun.keong.tan@citi.com
government’s fiscal measures, and the opening of the two integrated resorts
by early 2010 will support the recovery.
Turning positive – Because [1] economic indicators appear to be stabilizing,
with some improving; [2] bear market is already in its 79th week, the late
stages of bear cycle; [3] consensus 12m forward STI earnings growth have
fallen to -23%, consistent with -25% to -34% in past recessions; [4]
valuations look attractive, trading at 1.15x PBV, about one and a half
standard deviations below our adjusted historical PBV mean of 1.63x, and
one of the cheapest in Asia ex-Japan (alongside Thailand & Taiwan); [5]
SGD downside risk looks limited following MAS devaluation & maintenance
of neutral bias.
12-month STI target at 2400 by March 2010 – Market valuations should
normalize and recover closer to mean PBV valuations once the economy is
out of the recession. Our STI target of 2400 represents a conservative PBV of
1.47 times, still 0.5 standard deviation below our “adjusted” 12m trailing
PBV mean of 1.63 times. Previous recoveries from recessions saw the STI
revert to PBV mean in less than a year: 1998 Asian crisis (32 weeks), 2001
tech slump (15 weeks) and 2003 SARS recession (45 weeks).
Buying just past the worst GDP quarter in past recessions has consistently
delivered positive, even exceptional, returns – Buying on the first day of the
month after the worst GDP quarterly contraction has produced an average
return of +38% over 6 months and +53% over 12 months in the past 4
recession episodes. Our 12m STI target of 2400 represents about 27%
upside from current levels.
Buy the market on pullbacks – This recent STI rally has been exceptionally
sharp, even compared to “genuine” market recoveries in the past 4
recessions. The STI is up +23% in a month, above the average +11% of
genuine recovery rallies in the last 4 recessions. The market might pull back
to 1700 levels, but the likelihood of re-testing recent lows of 1460 is low. We
would be buyers on pullbacks.
Top Buys are DBS, UOB, SGX, Keppel, Wilmar and ST Engineering. Top Sells
are SIA and Capitaland – Overweight financials and commodity-related
names, and underweight telcos in the recovery phase. Neutral on property
and REITS.
24 Citigroup Global MarketsThe Asia Investigator
21 April 2009 Singapore Strategy: Recession & Recovery
We expect the recession to be over by the fourth quarter 2009. Our 12-month STI target is 2400,
which represents a PBV of 1.47x, or a 0.5 standard deviation below our conservatively adjusted
historical PBV mean of 1.63 times. Recoveries have been swift in past recessions, with the STI
returning to mean PBV in less than a year: 1998 Asian crisis (32 weeks), 2001 tech slump (15
weeks) and 2003 SARS crisis (45 weeks). We are factoring a more gradual U-shaped economic
recovery, versus the V-shaped recoveries seen in past recessions.
We are turning positive because: [1] Economic indicators appear to be stabilizing, with some
improving; [2] Past recessions show that the most opportune time to buy stocks is just past the
quarter of the worst GDP contraction; [3] This bear market is already in its 79th week, the late
stage of the bear market cycle and just shy of the average 85 weeks seen in past recessions; [4]
Consensus 12m forward STI earnings growth has fallen to -23%, close to the -25% to -34% range
seen in past recessions; [5] Singapore market (alongside Thailand & Taiwan) is one of the cheapest
in Asia ex-Japan; [6] Valuations remain attractive despite recent rally, trading at 1.15x PBV, about
1.5 standard deviations below the adjusted 1.63x PBV mean; and [7] SGD currency downside risks
look limited, following MAS devaluation and maintenance of a neutral bias.
Recession Over by 4Q, 12m STI Target 2400
Turning positive at this late stage of the We are turning more positive at this late stage of the economic and bear market
recession and bear market cycle cycle. We are into the fourth quarter of this recession, since slipping into a
technical recession in 3Q last year (see Figure 1). Past recessions have never
lasted more than 4 quarters, but this recession will probably last 5 quarters.
We are into the 79th week of this bear market, just two months shy of the
average 85 weeks seen in previous recessions. The bear market during the
Asian crisis lasted 82 weeks.
Figure 1. STI and GDP growth – Recession and Recovery
9.0% Mar-08 1Q09 GDP chg - Gov't flash estimate Mar-10 3400
6.7% 2Q-4Q09 GDP chg - Citi estimates 6.7%
7.0%
3200
5.0% Jun-08
3000
2.5%
3.0%
Sep-08 Dec-09
2800
1.0% 0.0% 0.3%
2600
-1.0%
-3.0% 2400
-5.0% Dec-08 2200
-4.2%
-7.0% Sep-09 2000
-6.2%
-9.0% Jun-09 1800
-8.2%
-11.0% 1600
Mar-09
-13.0% yoy GDP chg 1400
STI -11.5%
Source: CEIC, Bloomberg, Citi Investment Research and Analysis
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