ed: JS / sa: JC, PY Regional equity strategist Joanne Goh (65) 6878 5233 [email protected]Fig. 1: Summary of market recommendations Overweight China / Hong Kong Indonesia Neutral Singapore India Thailand (downgraded from Overweight) China ‘A’ shares Underweight Taiwan Korea Philippines Malaysia Source: DBS Fig. 2: Regional markets, P/E valuations and earnings growth 10-yr Avg +1SD 2015 2016F 2017F 2015 2016F 2017F Hong Kong HSI 11.8 14.3 12.7 13.1 11.9 -9.3 -2.6 9.9 MSCI China 11.4 14.5 13.7 13.6 11.9 -3.3 0.7 14.4 MSCI HK 15.3 17.1 17.3 17.2 16.0 -13.5 0.3 7.8 China 'A' 14.7 19.1 19.1 18.0 15.7 -0.9 9.4 14.8 Singapore 13.5 15.1 12.4 13.2 12.6 -4.4 -6.2 4.4 Korea 9.9 11.1 11.9 11.1 10.2 16.6 6.9 9.1 Taiwan 14.1 17.4 14.0 14.8 13.2 -0.1 -5.1 11.5 India 15.6 18.0 22.4 19.8 16.7 4.1 12.3 18.4 Malaysia 14.6 15.8 16.6 17.2 16.0 -1.3 -3.5 7.2 Thailand 11.3 12.9 17.4 15.6 13.9 -1.4 11.1 12.4 Indonesia 13.3 15.1 19.6 18.4 16.0 -8.2 6.6 15.3 Philippines 15.9 18.5 21.6 19.9 18.3 5.8 8.2 8.8 Asia ex-Japan 11.9 13.4 14.0 13.9 12.5 0.4 1.8 11.7 US 14.1 15.7 18.8 18.7 16.6 0.3 0.4 12.9 Japan* 15.0 18.7 14.4 13.0 12.0 10.4 10.3 8.5 Europe 12.1 14.1 nmf 16.6 14.6 -5.7 -1.7 13.2 Developed markets 13.5 15.3 18.0 17.9 15.9 -2.9 0.4 13.1 Emerging markets 11.0 12.4 14.8 13.9 12.3 -6.8 6.9 13.0 P/E (x) Earnings growth Source: Datastream, IBES, DBS. * Numbers for Japan are for FY March 2016-18 respectively. Numbers in bold are below 10-year average. Highlighted cells are above +1SD. Regional Market Focus Asia Equity Strategy Refer to important disclosures at the end of this report DBS Group Research. Equity 20 September 2016 Pain, but no collapse Stay cautious in 4Q as market volatility tends to rise. Valuations, the US presidential election, Fed policy and flow reversal are key issues Cheaper valuations could provide better entry points later on, especially for ASEAN markets Indonesia, and Hong Kong/China are our top markets for prospects of stronger earnings growth and equity flows next year Taiwan, Korea and Malaysia remain as Underweight as we find very few reasons to like these markets Thailand is downgraded to Neutral, Philippines remains an Underweight. Watch for growth surprise and cheaper valuations which could lead us to upgrade these markets The last quarter has brought us closer to the first rate hike for the year which the strategy team believes to be likely in December. In line with a better-than-expected and improving macro conditions (stable oil price - up from lows in February with a WTI price per barrel of US$42; easing monetary conditions – world of zero-to-negative interest rates and low bond yields; moderate economic recovery – global economies averting a recession), Asia markets have generally performed well year-to-date. However, a lack of earnings growth has given rise to rich valuations, and forward PE valuations are now above their long-term averages, which make these markets vulnerable to negative news, in our view. Thus, we believe it pays to be cautious in 4Q in view of a few unsettled issues on the horizon, as history suggests that September and October are the most volatile months of the year. Nonetheless, fundamentals in Asia markets are improving, which could give rise to better earnings outlook next year. Any weakness should be deemed as a buying opportunity, in our view. Our top pick markets are Indonesia, China (H-shares and MSCI China), and Hong Kong (HSI, MSCI Hong Kong). Taiwan, Korea and Malaysia are Underweight as we do not see the markets trading out of their respective ranges. Philippines is an Underweight as we see more downside to the index levels in the near term but will be interested to pick up on lower valuations. Singapore, Thailand and India are Neutral.
Source: Datastream, IBES, DBS. * Numbers for Japan are for FY March 2016-18 respectively. Numbers in bold are below 10-year average. Highlighted cells are above +1SD.
Regional Market Focus
Asia Equity Strategy
Refer to important disclosures at the end of this report
DBS Group Research. Equity 20 September 2016
Pain, but no collapse
Stay cautious in 4Q as market volatility tends to rise.
Valuations, the US presidential election, Fed policy
and flow reversal are key issues
Cheaper valuations could provide better entry points
later on, especially for ASEAN markets
Indonesia, and Hong Kong/China are our top markets
for prospects of stronger earnings growth and equity
flows next year
Taiwan, Korea and Malaysia remain as Underweight
as we find very few reasons to like these markets
Thailand is downgraded to Neutral, Philippines
remains an Underweight. Watch for growth surprise
and cheaper valuations which could lead us to
upgrade these markets
The last quarter has brought us closer to the first rate hike for the year which the strategy team believes to be likely in December. In line with a better-than-expected and improving macro conditions (stable oil price - up from lows in February with a WTI price per barrel of US$42; easing monetary conditions – world of zero-to-negative interest rates and low bond yields; moderate economic recovery – global economies averting a recession), Asia markets have generally performed well year-to-date. However, a lack of earnings growth has given rise to rich valuations, and forward PE valuations are now above their long-term averages, which make these markets vulnerable to negative news, in our view. Thus, we believe it pays to be cautious in 4Q in view of a few unsettled issues on the horizon, as history suggests that September and October are the most volatile months of the year. Nonetheless, fundamentals in Asia markets are improving, which could give rise to better earnings outlook next year. Any weakness should be deemed as a buying opportunity, in our view. Our top pick markets are Indonesia, China (H-shares and MSCI China), and Hong Kong (HSI, MSCI Hong Kong). Taiwan, Korea and Malaysia are Underweight as we do not see the markets trading out of their respective ranges. Philippines is an Underweight as we see more downside to the index levels in the near term but will be interested to pick up on lower valuations. Singapore, Thailand and India are Neutral.
Market Focus
Asia Strategy
Page 2
Fig. 3: Asia stock ideas for 4Q 2016
Pric e Ta rge tCompa ny Code 16/9 Pric e %
(LCY) (LCY) ups ide Rcmd 16E 17E 16F 17F 16F 17F
Hong Kong (Be ne fic ia rie s of southbound flows, e a rn ings re cove ry)Kingdee 268 HK HK$ 3.04 4.00 32% BUY 56% 12% 0.8% 0.6% 25.9x 23.4xValue Partners 806 HK HK$ 8.14 9.80 20% BUY 130% 57% 1.9% 2.8% 23.9x 15.2xGoldwin 2208 HK HK$ 12.56 16.00 27% BUY 12% 19% 5.4% 6.4% 9.3x 7.8xND Paper 2689 HK HK$ 6.60 6.70 2% BUY -26% 1.2% 2.9% 25.4x 10.2xCMB 3968 HK HK$ 18.96 23.68 25% BUY 6% 11% 4.6% 5.1% 6.6x 5.9x
Indone s ia ( Gove rnme nt spe nding, la gga rd Ba nks, Consume r)Mitra Keluarga Karyasehat MIKA IJ Rp 2,810 3,150 12% BUY 21% 16% 0.9% 1.0% 59.7x 51.5xIndofood Sukses Makmur INDF IJ Rp 8,475 9,700 14% BUY 30% 24% 2.6% 3.2% 19.3x 15.6xBank Central Asia BBCA IJ Rp 15,100 16,200 7% BUY 7% 9% 1.5% 1.6% 19.3x 17.8xPT PP (Persero) PTPP IJ Rp 4,430 5,700 29% BUY 29% 26% 0.9% 1.1% 22.5x 17.9xBank Danamon BDMN IJ Rp 3,700 4,400 19% BUY 48% 23% 2.0% 3.0% 10.0x 8.1x
Tha i la nd (Re s i l ie nt e a rn ings, yie lds , ASEAN pla y)CP ALL CPALL TB Bt 58.50 75.00 28% BUY 19% 24% 2.2% 2.7% 32.4x 26.2xDigital Telecommunications DIF TB Bt 14.90 16.60 11% BUY 9% 9% 6.5% 7.0% 15.8x 14.4xGroup Lease GL TB Bt 36.25 50.00 38% BUY 83% 52% 0.8% 0.9% 51.8x 36.8x
Ma la ys ia (le ss vo la ti le )Tenaga Nasional TNB MK RM 14.36 16.60 16% BUY 20% 1% 2.4% 2.4% 10.9x 10.8xPublic Bank PBK MK RM 19.50 22.60 16% BUY 5% 9% 3.0% 3.2% 14.3x 13.1x
Phi l ipp ine s (re s i l ie nt dri ve rs )Puregold Price Club PGOLD PM PHP 44.95 50.00 11% BUY 12% 15% 0.7% 0.7% 22.4x 19.4xRobinsons Retail Holdings RRHI PM PHP 79.05 88.00 11% HOLD* 13% 14% 0.8% 0.9% 22.2x 19.6x
* under review due to better upside after the recent correction Source: Bloomberg Finance L.P., DBS Bank, DBS Vickers, AllianceDBS, First Metro Securities, KTB Investment & Securities
Market Focus
Asia Strategy
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Table of Contents
Pain, no collapse 4
Asia valuations close to previous highs 4
US presidential election 4
“Tightening” tantrums 5
Earnings outlook remains weak with hopes 7 pinned on next year
2015 correction – US and China 7
Flow reversal 8
Strategy and asset allocation 9
Market views 9
China / Hong Kong (Overweight H-shares, MSCI China, 11 MSCI Hong Kong, HSI; Neutral ‘A’ shares)
Singapore (Neutral) 12
Indonesia (Overweight) 13
Malaysia (Underweight) 14
Thailand (Downgrade to Neutral) 15
Philippines (Underweight) 16
Taiwan (Underweight) 17
Korea (Underweight) 18
India (Neutral) 19
Market Focus
Asia Strategy
Page 4
Pain, no collapse While pain is expected in the current quarter, we do not expect a repeat of a market collapse as in 2015. We recommend investors to buy on weakness. The key issues, details are discussed below, that markets have to grapple with but will soon blow over in the fourth quarter are: 1. Asia’s high valuations;
2. Uncertainty over US presidential election;
3. Tightening tantrums;
4. Weak earnings outlook;
5. Reminiscence of 2015 correction;
6. Fear of flow reversal.
Asia valuations close to previous highs Clearly, Asia valuations have risen above their long-term averages, as a lack of earnings growth and rising stock prices have re-rated stocks instead. On a PE basis, levels are close to post-GFC crisis high, and near levels where some form of consolidation is quite likely, as in the two past incidents in the 2015 market selloff, and 2010/11 US debt ceiling crisis. (Fig. 2) On a PB basis, Asia markets are still about 8% away from the top of the recent range.
Fig. 4: MSCI Asia ex-Japan — 12-month forward PE
9
10
11
12
13
14
15
16
17
Sep-06 May-08 Jan-10 Sep-11 May-13 Jan-15 Sep-16
(x)
Source: Datastream, IBES, DBS. Horizontal lines are average and +/- one standard deviation bands Our sense is that consolidation is not going to be deep, as there is very little evidence these incidents are likely to repeat. The uncertainty of a Fed US rate hike leading to higher interest rates and stronger USD and inducing capital outflows, and a non-consensus US presidential election win could eventually create some sort of political instability in the financial markets, are tail risk assumptions which need to be blown over. As long as these two events remain an overhang, Asia markets are likely to be trapped within their trading ranges. Current valuations are on the top side of the trading range, underscoring the downside risks markets are facing.
Among Asia markets, four trade above +1SD over their 10-year averages, while only two trade below their 10-year averages. (Fig. 3) We recommend investors to pay close attention to valuations, and look for drivers such as yield, earnings visibility, and specific domestic factors for good support in these markets and sectors.
Asia ex-Japa 11.9 13.4 14.0 13.9 12.5 13.2 12.7 11.2
P/E (x) Range
Source: Datastream, IBES, DBS. Numbers shaded in pink trade below average, those in grey trade above +1SD US presidential election US financial market volatility is expected to be quite high as the country prepares for its next presidential election. Various studies have concluded that financial market volatility is usually high in September – October, and even more so and in an election year. Monthly price declines and frequencies of negative returns were even greater during presidential election years without an incumbent candidate. However should an incumbent party win by a landslide victory, a year-end rally should follow. Consensus views that the incumbent party should win, but remains uncertain how close the race is going to be, which suggests that the current market has probably priced in what is expected, and a low chance of an opposition party win that could upset the market. In view of the high correlation of the global market with the US, it remains prudent to watch for the election results. We believe investors are likely to remain on the sidelines running up to the elections, with muted market activities. The US market is unlikely to provide much upside for global markets prior to the elections. Hence for Asia, unless there are specific market news, we believe the current consolidation could last.
Market Focus
Asia Strategy
Page 5
Fig. 6: Correlation with the US is rising
0.38
0.43
0.48
0.53
Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16
with US
with China
r
Source: DBS
Fig. 7: Odds for US presidential election
Source: Precisewise “Tightening” tantrums Growing expectations of the Fed's rate hike in coming months should put a dampener on markets in the near term. We are assuming a base case of a Fed rate hike in December, and the USD and LIBOR should rise as expectations of a December rate hike gathers. The market estimates the probability of an increase in December this year at 57.8% While US non-farm payroll data is as volatile as ever, the latest ISM manufacturing survey data shows that the US economy has returned to contraction mode, and that the services data have declined. Inflation remains low, and that includes the PCE inflation data. Wage inflation, core inflation, and household income, however, have risen. There will be concerns over if Fed is making a policy mistake if it raises rates in such a scenario when growth is lacking. Confidence in growth, and the rise in longer term bond yields may not follow suit.
Fig. 8: US non-farm payrolls — volatile as ever
Source: CEIC, DBS Implications #1 – short rates in Singapore, Hong Kong and offshore CNH to move There are a few implications for fund outflows in the region should there be a rate hike, especially the CNY. An increase in USD fed fund rates will drive an increase in short-term interest rates and bring on short covering of local currency liabilities (vs the USD). Short rates could also spike up, especially in Singapore and Hong Kong. USD versus many Asia countries will have upward pressure.
Fig. 9: Offshore liquidity kept tight to deter speculators
Source: Bloomberg Finance L.P., DBS
Fig. 10: 3M SGD SOR below 3M USD — SGD rates could spike up upon Fed hikes, USD/SGD uncertain
Source: Bloomberg Finance L.P., DBS
Market Focus
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Implications #2 – bond yields may not rise, still like Singapore REITS With Japan and Europe still on negative interest rates, we believe that the search for yield is still on. Our fixed income strategist expects the long end of global bond yields to see little impact from Fed hikes as they continue to be pressured by deflationary concerns, and negative interest rates outside the US. 10-year US bond yield is thus expected to stay around current levels by year-end. We continue to like the Singapore REITs, following its own sector classification which helps with its identification as an important sector. However ECB’s inaction in its last policy meeting has capped further downside on global bond yields, in our view.
Fig. 11: UST, JGB and German Bund curves — 10Y UST yield appear well-anchored, dependent on Japan and ECB’s stimuli
Source: Bloomberg Finance L.P., DBS Implications #3 – ASEAN most sensitive to weakening domestic currencies, Fed funds rate hikes; H-shares less vulnerable We revisit our sensitivity analysis of Asian markets to the various factors that could potentially result from a potential US rate hike in the charts in Fig. 12-14. In general ASEAN markets are more sensitive to currency weakness resulting from rate hikes (USD strengthening), rising US fed hikes, and rising US bond yields. However we would like to emphasise that circumstances are different now. Asia markets would prefer a weak currency; their short rates are under no pressure to rise with the US except in Singapore and Hong Kong, and bond yields are likely to stay low on global deflationary threat. Unless these changes are abrupt, we believe that impact on Asian markets should be short-lived.
Fig. 12: Asia markets — sensitivity to weakening
domestic currencies
Source: DBS
Fig. 13: Asia markets — sensitivity to Fed funds rate hikes
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2( correlation coefficient)
most affectedleast affected
Source: DBS
Fig. 14: Asia markets — sensitivity to rising US bond yields
Source: DBS
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Earnings outlook remains weak with hopes pinned on
next year
Asia markets continue to be affected by a weak global growth outlook. Earnings growth for the region remains weak with much hope pinned on a recovery from next year onwards. Earnings results for the first half of this year were generally in line with expectations which had already been lowered against an uncertain macro backdrop. Growth in top line was generally weak and focus was placed on those driven by government spending (Construction, Building Materials), and resilient sectors such as Healthcare, Telcos and Consumer Staples. Margin pressure remains in general with the lack of pricing power, while a lower oil price helps relieve some cost pressure. “New economy” sectors such as gaming and software IT and e-commerce are the only bright spots. Pockets of growth are found in mid- to small-cap stocks which are leaders in their respective space and are able to control costs appropriately. A realisation reached at the recent G20 meeting in China Hangzhou is the limitation of the effectiveness of the use of monetary policies in stimulating economies, and encouragement for countries with the capacity to use fiscal stimulus programmes to do so. Looking forward, as global uncertainties abate somewhat, investors will be able to focus more on the prospects of an economic recovery even as the global central banks turn off the tap.
Fig. 15: Asia markets — Consensus earnings growth forecasts
Asia markets have just recovered in August from their one-year negative performance after two extended corrections —one in August 2015 , and one in December 2015 — during the past one-year period. Both were indeed due to increasing Fed rate hike expectations and the CNY devaluation. Concerns that history will repeat itself are spooking investors. Last year the CNY was devalued by 3% once in August from 6.21 to 6.41, and again depreciated from 6.32 to 6.6 from early November last year to the middle of January this year. The Fed finally hiked rates once in December after hawkish rhetoric set the tone as early as middle of 2015.
Fig. 16: US and MSCI Asia ex-Japan — tightening tantrums started as early as May
USD/CNY, inverse
J F M A M J J A S O N D J F M A M J J A S80
85
90
95
100
105
110
115 6.10
6.20
6.30
6.40
6.50
6.60
6.70
6.80
USD/CNY
Asia ex-Japan
S&P500
index, rebased
Source: Datastream In recent weeks, the CNY has been steadily climbing towards 6.7 from 6.5, translating to a depreciation of about 3% since May. Fed rate hike expectation has also been building up in recent weeks on Fed officials’ rhetoric, with rate hike expected to be as soon as 21 September. Last year’s US rate hike was the first in 10 years, and with the Fed officials then sounding hawkish in general, a “moderate” rate hike schedule was thought to be once every quarter with a target of 3% by 2018. During the year, perception and the Fed’s “dot” plots have been scaled down to two hikes for this year. Currently, the Fed funds futures is only pricing in a 27% chance of another rate hike throughout 2017. Hence, unlike last year, a December rate hike would not necessarily lead to the belief that there will be more increases in 2017, now that the terms “normalisation” and “moderation” are more understood.
Source: Bloomberg Finance L.P., DBS The CNY depreciation last year was mainly due to speculative positions on the offshore CNH which trades at a big discount to the CNY, a build-up of offshore short-term USD liability against the CNY, and a less transparent currency policy by the PBOC. During the year, the CNH-CNY premium has closed up, external debt has declined, and with the introduction of the RMB basket index and its trading band, currency policy has been clearer as well. The CNY is also on schedule to join the IMF’s Special Drawing Rights (SDR) basket effective 1 October, which should also increase the demand for CNY and hence limit outflows. PBOC is also more prepared to handle speculation and outflows on the CNY by being quick to inject liquidity and increase costs of borrowing.
Fig. 18: CNY spot vs RMB index — moving more in line with each other
Source: Bloomberg Finance L.P.， Datastream, DBS
Fig. 19: CNY – CNH spread
Source: Bloomberg Finance L.P. As such, we tend to think that this time round, market reactions to financial markets should not be as volatile as last year. (For details, see DBS Economics —Markets—Strategy 4Q16: “CNH: ready to go”, Nathan Chow, 15Sept) Flow reversal
Asia have been the prime beneficiary of the low interest rate environment and is back in vogue once again in a major way, as evidenced by the strong inflows in the past two months. Year-to-date, foreign flows to Asia (excluding Singapore and Hong Kong) added up to US$36.7bn, which is almost equivalent to the inflow in 2014. In July and August alone, total flows were US$21bn. From the perspective of a half-full glass, one could argue that focus on emerging markets has just returned again, and with a more dovish Fed, serious investors will make use of a correction to add to positions. However, in the event of a massive exodus, correction will be quick and sharp, while sentiments will again turn and find it difficult to return another round. The imminent Fed rate hikes could play a role in what happens next.
Market Focus
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Fig. 20: Net foreign flows to Asia equity markets
US$mil Indonesia Thailand Philippines Malaysia India Korea Taiwan S'pore **Hong
Aug-16 1,109 897 66 422 1,139 916 2,386 NA NA 6,935
Sep-TD (181) 364 (267) (40) 200 909 (722) NA NA 263 Source: Bloomberg Finance L.P., EPFR, FirstMetro Securities, Bursa, DBS. ** Numbers from EPFR fund survey Strategy and asset allocation
The strategy team’s base-case scenario of one rate hike in December and a moderate rate hike schedule for next year, which is in line with consensus, should see risk appetite for Asia markets returning after the September Fed meeting. Fed chatters and CNY risks are causing volatility which should present opportunity to accumulate quality stocks for longer-term investments and the prospects of economic recovery next year. Our high-conviction picks are in Indonesia, and Hong Kong (both Hong Kong and Chinese shares). In Indonesia, we believe the new finance minister and economic minister can work hand in hand with President Jokowi to achieve the latter’s reform ambitions. China’s continuous capital market reform should attract flows to the Hong Kong market which has been undervalued for some time. We are Underweight in Philippines for valuation reasons, and the reactions to the spate of negative news recently reflect the markets’ vulnerability. We continue to see Korea and Taiwan trading in a tight range in this environment. We stay Underweight in Korea as we are concerned on the downsides risks from the failure of Hanjin Shipping group on the broader economy and other sectors. Taiwan could start to see growth disappointments in the second half. We are downgrading Thailand to Neutral on a tactical view after a very strong performance and significant inflows.
ASEAN vs China – prefer China The case for ASEAN vs China remains clear in the second half of the year as the uncertainty brought about by the Fed hikes are likely to dampen the risk appetite for ASEAN markets. Firstly, the ASEAN region trades at a premium to the Hong Kong / China market. Secondly the ASEAN markets, together with their currencies, have outperformed in the first half of the year. Thirdly, inflows to these markets have also picked up significantly in the short three months. The Hong Kong market has underperformed in all these three aspects. Moreover our sensitivity analysis on Fed hikes suggests that ASEAN market are more sensitive to weakening domestic currencies, Fed funds rate hikes and H-shares are less vulnerable.
Fig. 21: ASEAN vs China — relative valuation vs relative performance
Korea 1999 2050 2.5% UWSaumsung's S7 surprise, China's
growth surprise
Domestic demand wanes; lack of
stimulus support; exports
slowdown aggravates; overhang
from Hanjin Shipping bankruptsy
Taiwan 8902 8800 -1.1% UW
Stronger global recovery, effective
new government policies, yield
surprise, stable NTD, new gadget
Global growth slowdown persists;
China policies turn antagonistic;
disappointing iphone 7 sales
India 28372 30000 5.7% NRisk appetite for EM returning,
reform gathering pace
Reform hiccups, earnings growth
downgrades, BRICS theme return
Asia ex-
Japan663 689 3.9% N
Risk appetite for EM returning;
dovish Fed, stable oil price
Global growth concerns persist;
China angst persist
MarketCurrent
index
12M
view
Targeted
return to
yearend
Source: DBS
Market Focus
Asia Strategy
Page 11
China / Hong Kong (Overweight H-shares, MSCI China,
MSCI Hong Kong, HSI; Neutral ‘A’ shares)
We had raised China/Hong Kong to Overweight in the last quarter and indeed HSI and H-shares were the among best performing markets in 3Q. Going forward, we believe that the outperformance can continue, due to positive sentiments from better-than-expected earnings announcements and potential opening of the SZ-HK connect, and as the CNY joins the SDR basket effective 1 October. Earnings have also been supportive of the rally. Although there are concerns that the market is still very policy driven, we believe regulatory policies should be moderate to ensure a low-volatility environment. Note that the performance in the A-share market has been more muted compared to the boom bust in 2015, and de-regulations have been met with more sobered reactions by the market. We should see more market-friendly measures to maneuver a positive trading environment in China. With the H-shares trading at cheap valuations, there is still plenty of room for re-rating, in our view. There are many possibilities for more upside surprise in the market. The inclusion of ‘A’ shares in MSCI international benchmark is a matter of time, and that could happen before the next MSCI annual review next June. CNY inclusion in the SDR basket will take effect on 1 October, thus moving towards a more market oriented mechanism in time to come. So far the CNY depreciation has been orderly and in line with the RMB basket index. The fear of a sharp CNY devaluation, such as last year’s should fade. Growth in China has been more stable in the second half and sentiments should improve if the trend continues. The risk appetite for emerging markets could return after the current volatility episode. In particular, the BRICs investment theme could return after Russia and Brazil show signs of economic recovery. China will benefit from this broader investment theme.
Fig. 23: BRICS investment theme could return in vogue (index)
J15F M A M J J A S O N DJ16F M A M J J A S40
50
60
70
80
90
100
110
120
130
140
150
Russia
India
Brazil
China
Source: DATASTREAM Source: Datastream
We like the H-shares due to their cheaper valuations, MSCI China as a proxy for the overall Chinese economy with the inclusion of the “new economy” stocks, HSI and MSCI Hong Kong as a prime beneficiary of sound-bound flows. We rate the ‘A’ shares as Neutral. Investment options by Chinese investors have yet to include the ‘A’ shares due to its high volatility, in our view. We believe government controls are still present to prevent a boom-bust cycle like last year’s.
Fig. 24: A-share, H-shares, MSCI China — 12-month forward PE
(x)
J15F M A M J J A S O N D J F M A M J J A S8
10
12
14
16
18
20
22
24
A-shares
MSCI China
H-shares
Source: DATASTREAM Source: Datastream, IBES, DBS
Fig. 25: Southbound stock connect Buy and Sell trades as a percentage of total HK trading turnover
Source: DBS Vickers
Fig. 26: Resilient Hong Kong residential property prices — decade of household deleveraging and low interest rates
Source: CEIC, HK Rating and valuation department
Market Focus
Asia Strategy
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Singapore (Neutral)
Singapore market has been the worst performing market in Asia this year. The market has been plagued by poor economic growth, weak oil & gas industry imposing on employment and the services sector, cautious financial sector, and weak property market. Consensus earnings growth for MSCI Singapore stands at -5.9% this year, after falling 4.4% last year, and only 4.3% for next year. Earnings recession is likely to be prolonged with GDP growth for next year at 1.9%, only a tad higher than this year’s 1.5%. Fig. 27: MSCI Singapore earnings growth vs STI
performance
(60)
(40)
(20)
-
20
40
60
80
100
-30
-20
-10
0
10
20
30
40
50
00 02 04 06 08 10 12 14 16F 18F
(%)
Earnings growth (L) Annual performance (R)
Source: Datastream, IBES, DBS There are two ways that Singapore tries to differentiate itself: 1) growth through regional exposure especially in the high-growth areas such as in ASEAN, China and India; and 2) serving as a yields haven in this yield grab environment. These two themes have been working well this year as the regional currencies and economies have been more stable this year. We believe investors can outperform the market with portfolio populated with stocks based on these two themes. DBS economist Irvin Seah continues to warn that risks lie ahead for the Singapore economy as the services sector, which constitutes about two-thirds of the Singapore economy, is already in “technical“ recession, after having already contracted two quarters in a row. Hence, unless the manufacturing sector surprises in a big way, we are unlikely to see the economy recovering this year. Moving on, the strategy team believes big infrastructure projects like the Singapore – KL high speed rail (HSR) may be needed to give a structural lift to growth prospects in the longer term. On this end, there are tentative signs that the project is likely to be a reality after more than 20 years of delay, when the Land Transport Authority of Singapore (LTA)
called for tender to be closed in October for a Joint Development Partner for the project. The Singapore government has already started planning works in the Jurong West area, which is designated for the terminus station for the HSR. Other ongoing infrastructure projects include the SmartNation, and the extension of Mass Railway Transport (MRT) lines. Progress on a fourth Telco player and Public Transportation reform have already been made. The government has also announced it will be reviewing the “CPFIS”, an investment option in the Central Provident Fund scheme. This could hopefully unleash more liquidity into the Singapore stock market. Near term, DBS Singapore strategist Janice Chua is cautious on the Singapore market and believes that the Singapore Straits Index (STI) could test the post-Brexit low of 2714 in the next 1-2 months. Two binary events that could induce a major correction includes a possible rate hike in the September Fed meeting (September 22 Asia time), and an informal oil producers meeting at end of September to discuss production freeze, should the outcomes turn against expectations. (See “Shadow of September - October Volatility”, Janice Chua et. al., 29 August). From a regional perspective, Singapore corporates have the worst earnings profile. Nonetheless we like the market for its high yields, and its undemanding valuations which leave room for re-rating should global risk appetite return, and should there more be evidence that the economy has passed its worst. Fig. 28: Singapore: Lowest PE and highest yields among
regional markets
Singapore Taiwan
HSI
Thailand MSCI HK
Malaysia
MSCI China
Asia ex-Japan
Indonesia
Korea China 'A' Philippines
India
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
9.0 11.0 13.0 15.0 17.0 19.0 21.0
Div
iden
d y
ield
(%
)
12-month forward PE (X)
Source: Datastream, IBES, DBS
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Indonesia (Overweight)
The Indonesia market soared in July-August as risk appetite for emerging markets improve amidst low global bond yields and a dovish Fed stance. The domestic investment climate is also clearing on the back of a stable and strong rupiah, Jokowi’s economic stimulus package (especially the tax amnesty bill, and interest rate cuts), and lately a better-than-expected 2Q16 GDP growth which hinted at growth bottoming. Fig. 29: Indonesia — foreidn reserves and portfolio
flows
Source: CEIC, DBS We have upgraded Indonesia to Overweight with a 12-month target of 5900. The investment climate could continue to improve as policies are being rolled out. Bank Indonesia (BI) expects the new tax amnesty plan to draw in some IDR560tn of inflows between July 2016 and March 2017. The Jokowi government is also mulling corporate tax cuts, while there is still room for BI to cut rates further. There is still room for market valuations to trade higher given the positive investment climate. The Indonesia market had re-rated in the early 2000s, driven by improving risk appetite in emerging markets and as the country entered a higher-growth era. Subsequently, the re-rating has paused in the last five years post the GFC amid the commodity cycle bust. With Jokowi’s reform agenda, we believe the re-rating could continue and the market could potentially trade up to 17x PE, translating to 5900 by year-end based on 10% earnings growth (the blended average earnings growth in 2016 and 2017). Our base case is for earnings to grow at 7% and 14% in 2016 and 2017 respectively.
With the strong liquidity expected, the Indonesia market could sustain its surge. We outline below the blue sky scenario that could keep the party going: 1) Bottoming economic outlook if economic stimuli work
themselves into the economy; 2) Private sector growth boosting earnings outlook; 3) Further rate cuts if inflation stays below 4%; 4) Low global bond yields induced by global central banks
supporting the domestic bond market and attracting flows;
5) Rupiah stable at current levels. Fig. 30: Indonesia 12-month forward PE
0
2
4
6
8
10
12
14
16
18
0102030405060708091011121314151617
(x)
9% upside to 17x
Source: Datastream, IBES, DBS Market volatility and stretched valuations are our two major concerns. Worries remain from global political and economic uncertainty which could easily reverse risk appetite. The bigger macro picture of potential US interest rate normalisation (and hence stronger dollar and higher bond yields), slowing China demand (hence lower commodity prices), and above-average valuations are biased against Indonesia in the longer run. Hence, until earnings return in a big way, Indonesia will still be subject to the tides of emerging market risks. Near-term risks on a September Fed hike, the first for this year should present a good opportunity to accumulate Indonesia on weakness, in our view.
Market Focus
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Malaysia (Underweight)
We have downgraded Malaysia to Underweight mid-quarter. Recent headwinds from 1MDB, lower oil price and weak earnings should keep the market in check. Still maintaining our year-end target at 1700, there is very little room for us to raise the index target further given: 1. PE valuations are already above +1SD high at 16.1x.
Valuations have risen as the earnings downgrade trend continues despite a flattish market;
2. Consensus earnings growth (KLCI) for this and next year stays at -4.2% and 7.5% respectively. We are skeptical on the earnings recovery into next year. Coming from a low base, while we do not think that a 7.5% growth is unlikely, but further upgrades to earnings can be quite limited, in view of the weak economic momentum.
Fig. 31: Malaysia KLCI earnings growth — downtrend
continues
-40
-30
-20
-10
0
10
20
30
40
50
03
04
05
06
07
08
09
10
11
12
13
14
15F
16F
17F
18F
(%)
Source: Datastream, IBES, DBS 3. 2Q GDP growth has weakened to 4.0% from 4.2% in
1Q. In acknowledging the economic weakness, the central bank, Bank Negara (BN) has reduced the policy rate for the first time after holding on to the rate since 2014. Inflation came in at 1.1% in July, down sharply from 1.6% in June, affirming the demand weakness despite ongoing cost rationalisation in many of the subsidised sectors. DBS economist is forecasting that BN may cut rate again in November in view of the downside risk to growth.
4. Our base-case assumptions include: 1) stable oil price at current levels; 2) MYR relative to SGD at around 3; and 3) absence of a sovereign crisis, fallout in bond yields. These are the factors supporting the Malaysia market in recent months.
Fig. 32: Malaysia GDP growth — downtrend continues
Source: CEIC, DBS Fig. 33: Malaysia’s central bank’s BN rate cut vs US Fed
rate hike could lead to softer MYR
Source: CEIC, DBS The risks to our negative view on Malaysia is if there will be a snap election in early 2017. Street expectation has been rising on a snap general election in early 2017 although the incumbent federal government’s current mandate does not end until early 2018. This has led to a rally in politically-linked counters recently. Expectation for government to pump-prime before the elections could also lead to better domestic sentiments. A people- and market-friendly Budget 2017 is expected in October.
Market Focus
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Thailand (Downgrade to Neutral)
After a very strong YTD and quarterly performance, valuations in Thailand have shot up to above +2SD over its historical average. We believe Thailand could be vulnerable to profit taking ahead of the Fed rate hikes, US elections, and informal meeting among the major oil producers on production cuts. Indeed the market has corrected sharply in the first two weeks of September, reflecting its vulnerability to change in sentiments. We are downgrading the market to Neutral as near term headwinds could stop the strong foreign inflows. Fig. 34: Thailand — 12 –month forward PE
Source: Datastream, IBES, DBS Headwinds in the near term During the quarter, the SET index did indeed try to test our 12-month target of 1570 but was found to be unsustainable. We highlight a few issues that Thailand has to deal with in the near term:- 1. The heavyweight Energy sector which has been resilient despite lower oil prices is not in line with past correlation; 2. The construction of the MRT line will be delayed by about two years, which give rise to doubts about the accelerated bidding process in the last few months if the projects can smoothly follow through, and the high expectations of the bidding schedule for 2H16. Cost overruns are one of the main concerns for the Contractors 3. Recent bombing incidents across Thailand post the referendum on the constitution change suggests that political stability still fall short of expectations
Consumption remains the main drag The 2Q GDP is better than expected and there are signs that private consumption is picking up. However, our economist is doubtful that given the recent inflation data which has been coming in persistently below target, it seems rather unlikely that private consumption can continue to grow in excess of 3.5% YoY, like it did in 2Q16. Downside risks are present in his full-year GDP forecast. Domestic consumer and property stocks are indeed laggards in the markets but domestic consumption is unlikely to pick up in a big way unless political stability can be truly found. Together with the delay in some of the construction projects, loan growth could again fall behind expectations. We believe that without the push from these laggard stocks, the index could remain stuck, with downside bias as global macro uncertainty again rises in anticipation of rate hikes and a US election awaiting. Investors should avoid the domestic sentiment related stocks. In light of the recent security issues we are also avoiding the Tourism-related stocks. Inflows have hit a record high Foreign fund flows into Thailand has hit a record high compared to the past 10 years since 2005. Although it can be viewed positively in the context of negative flows in the last three years, the huge flows in the past two months should take a breather for the time being. Month-to-date flows to Thailand has slowed down to US$92m compared to US$2,255 for July-August. Foreign investors have just started returning to Thailand in a big way. We are concerned that a change of sentiments could dampen foreign investment inflows once again, and may take longer to return the second time around. Neutral for strong yields and earnings growth We like the market for its high yields, strong earnings growth, key sector niches, and a vibrant domestic investment environment. After all, Thailand is not the most expensive market among ASEAN on a absolute basis. Its earnings growth profile is also one of the better ones, with growth engine from a very diversified sectors. Our marketing feedback suggests that investors were generally underweight in Thailand and the short term rally in the past two months have caught most by surprise. We will be prepared to upgrade the market as soon as the headwinds blow over, and if growth momentum shows no sign of fading.
(x)
200620072008 200920102011201220132014201520166
7
8
9
10
11
12
13
14
15
16
Source: DATASTREAM
Market Focus
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Philippines (Underweight)
We are maintaining the Philippines market at Underweight. The Philippines market has enjoyed a post-election rally amid optimism on the new president. The two concerns we have on the Philippines are its rich valuations and unexciting corporate earnings growth. Despite strong economic growth, corporate earnings growth continued to hover at the 5-10% range while the PE continue to re-rate on economic optimism. Near term, we believe that the re-rating should take a pause as investors take profit ahead of the Fed meeting, and as well as with the increasing negative International media reports on the new president on his handling of sensitive issues such as the South China Sea disputes, and his controversial human rights record. These concerns should limit how far valuations can go, and if foreign investors will look for better opportunities elsewhere such as Indonesia. Undoubtedly Philippines has stood out in Asia as one of the fastest growing economy with a strong fiscal position. To be sure, DBS economist noted that the impact from the May elections turned out to be way more significant than what we had thought initially. 2Q16 GDP growth came in robust at 7.0% (YoY), well above our expectations. The economy has grown 6.9% in 1H16 alone, driven by a strong expansion across all the domestic components of the GDP. Private consumption grew a record-high 7.3% (YoY), government consumption expanded 13.5% while investment growth came in at 27.2%, bringing domestic demand growth in excess of 10% in 1H16. The sense of optimism has continued to linger in the private sector and investing domestically is still the priority for now. Besides, the new government is ready to step up its spending on infrastructure projects. The strategy team however believes that all these optimism has already been priced into the market, if one looks at the rich valuations in the equity, bond and exchange rates. We will review the market, should there be more evidence that the 3Q GDP can continue to excel after the elections, and should valuations fall to more reasonable levels. Near term, the peso may not have enough support as the current account has weakened. A revision to the central bank’s USD 5.8bn 2016 current account (C/A) surplus forecast is quite likely, as the surplus came in at USD 0.8bn in 1H16. The real drag on the C/A balance is the growing trade deficit, and exports of goods are set to fall another 5% this year. That the weakness is beginning to show in the electronics cluster is also a worry, given how this sector has emerged as a key driver of growth in recent years. The peso was the second worst performing currency in Asia ex-Japan year to date, and is not likely to recover.
Fig. 35: Philippines — robust investment growth in the
DBS economist is maintaining her GDP growth forecasts below the government’s, at 0.9% for 2016 and 1.8% for 2017. For the full-year GDP growth to match the government’s forecast, it requires the QoQ (saar) growth to reach 3% per quarter in 2H16, a notable rise compared to 1.8% in 1H16. In our view, although there are some signals that the short-term growth cycle is bottoming out, a sustainable recovery is yet to be confirmed. Even in the electronics sector where peak season demand is widely expected, the signs of recovery are not very apparent. July’s trade and production data had come in below expectations. Export orders shrank -3.4% YoY, worse than the -2.4% in June, albeit still better than the 2Q average of -6.4%. Likewise, industrial production slipped 0.3% in July, also down from the 1.1% growth in the prior month. It was the first contraction for industrial output after posting two consecutive months of positive growth in May-June. It is also worth noting that the tourism sector is losing steam. The number of total visitor arrivals grew just 1.9% (YoY) in Jul16, down from 2.2% in 2Q16 and sharply lower than the 15.9% in 1Q16. This was largely caused by the fall in Chinese tourists, which registered more than -10% decline for three consecutive months in May-Jul16 – the first time seen since 2008. It appears that Chinese tourists have been diversifying overseas travel destinations, partly due to the deregulation of visa policies by a rising number of countries, and partly due to the deterioration in cross-strait ties. Chinese visitors account for a dominant share of 40% in Taiwan’s total tourist arrivals and as a percentage of GDP, tourism revenues have risen notably to 2.8% in 2015 from 1.4% in 2008, thanks to the influx of Chinese tourists since then. A slowdown in this segment will have negative impact on GDP growth, inevitably. The spillover effects are likely to be felt by the labor market and a broad range of services sectors including retail trade, transport, food catering and accommodation. The market had performed better than expected in 3Q, thanks to the improvement in global risk appetite, GDP growth turning positive in 2Q, a bottoming signal in the Taiwan economy, and a crowded ex-dividends calendar. Moving forward, a weaker-than-expected recovery could dampen risk sentiment in the financial markets. Note that foreign equity inflows have started to retreat since last week after a strong rise in the first half of August and in July. Meanwhile, the USD/TWD has reverted to the range of 31.5-32.0 since 19 August, after dipping below 31.5 temporarily earlier this month. Current market valuation is hovering around the average 14x, leaving very limited room for re-rating. Consensus earnings
growth for this year and next are -4.9% and 11.1% respectively, and are unlikely to provide much upside market surprise, given the weak economic growth. We are maintaining our Underweight stance on the market.
Fig. 38: Taiwan: Number of tourist arrivals
Source: CEIC
Fig. 39: Taiwan industrial production, %YoY — no apparent signs of recovery
2011 2012 2013 2014 2015 2016-20
-15
-10
-5
0
5
10
15
20(%)
Source: DATASTREAM
Source: Datastream
Fig. 40: MSCI Taiwan 12-month forward PE nearing average
Source: DATASTREAM Source: Datastream, IBES, DBS (For details, see DBS Economics —Markets—Strategy 4Q16: “Taiwan: counting on electronics”, Tieying Ma, 15Sept)
Market Focus
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Page 18
Korea (Underweight)
We are maintaining Korea as Underweight. Undoubtedly, on the data front, the economy is showing some signs of a modest recovery. However, there are still headwinds facing the 2H outlook, given the government’s push for corporate restructuring in certain industries, implementation of an anti-corruption law in September and the persistence of external uncertainties. The progress of corporate restructuring is picking up, which should have negative spillover effects on the broad economy. For instance, Hanjin Shipping, the nation’s largest shipping company, has applied for court receivership this week after failing to reschedule debt with its major lenders. Consensus is expecting 7.3% and 8.4% earnings growth in 2016 and 2017 respectively. There should however be downside risks given that 1) interest rate cuts are negative for the Banks; 2) the Korean won, which is expected to weaken, has been strengthening instead and that should be negative for exporters; 3) corporate restructuring and reform which could hurt domestic sentiments; and 4) rising tension with China (Korea’s largest trading partner) has affected exports to China amid a general slowdown in the latter’s growth. Fig. 41: Korea Banks — non-performing loans ratio
Source: CEIC. SBL: substandard bank loans Standard & Poor’s (S&P) has recently raised Korea’s long-term sovereign credit rating to AA from AA-, citing the country’s steady economic performance, sound fiscal position, and flexible fiscal and monetary policies as the key reasons for the upgrade. Despite the upgrade, we do not see Korea assets been particularly attractive in this yield grab environment given that 10Y KTB yield is below the US’s and BoK is likely to cut rates next as opposed to US Fed hiking rates.
We continue to expect the KOSPI to trade within the 1950-2050 range and the valuation discount to the region to persist. Geopolitical risks, corporate governance, cross-holding accounting are some of the reasons for the valuation discount. For the KOSPI to stay sustainably above 2000 we need to see better confidence in China’s economic growth. Fig. 42: Korea Policy rate vs CPI inflation — still room to
cuts rates
Source: CEIC.
Fig. 43: Korea’s KOSPI stuck between 1950-2050 Index
2011 2012 2013 2014 2015 20161650
1700
1750
1800
1850
1900
1950
2000
2050
2100
2150
Source: DATASTREAM
Source: Datastream, DBS (For details, see DBS Economics —Markets—Strategy 4Q16: “Korea: relying on stimulus”, Tieying Ma, 15Sept)
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India (Neutral)
The biggest reform story in India was the GST bill reform, which has been approved and targeted for implementation starting April 1, 2017. While there will be growth, inflation and fiscal implications, and some likely delays in its implementation, the passing is a big step in registering that reforms in India has not stalled and positive sentiments in the market are likely to be sustainable. We are maintaining our view on the India market at Neutral, rather than upgrading to Overweight. While the top-down story in India is strong, it is not supported by valuations, earnings or index composition. India’s PE valuation is at 18x which is +1SD above its 10-year average. We believe there is very little room for re-rating. Headlines on major reforms, such as the GST bill, improving foreign investments and fuel subsidy reform, have already been issued and right now they are mostly on the implementation stage. While GDP growth has been strong, corporate earnings growth have been lagging and companies are not benefitting from these reforms as yet. Consensus earnings growth for 2016 and 2017 are 12.9% and 18.2% respectively. There should be more evidence that earnings growth can substantially improve. We believe that credit expansion holds the key for private sector growth. The India market has also been riding on the rate cut cycle in the past one year. DBS economist forecasts one more rate cut for the rest of the year and may not come by if inflation starts to pick up. However, rate cut has not materially led to lower lending rates in India due to higher provisioning requirements by the Banks. Fig. 44: India real growth drivers — high but uneven
Composition of India’s stock market lacks the new “new”. While the top-down story in India is strong, growth dynamics for the key sectors are not strong. For instance, Financials, IT and Healthcare, and Staples sectors are already 52% of the MSCI India Index and have their own set of issues to deal with. Financials are affected by slow credit growth and NPL provisioning, and both Technology and Healthcare sectors are affected by weak pricing power due to weak global growth, and the latter on global regulatory concerns. We like India on a top-down view, where we see reforms coming through and sound monetary and fiscal policies compared to previous years. Valuations can be supported at current levels as long as the global risk appetite for emerging markets stay. Foreign buying has been a key support for the market but domestic participation has slowed. Near-term risks on Fed rate hikes cannot be ignored considering the sizeable foreign flows in the past two months. Fig. 45: India’s Twin deficits on the mend
Source: CEIC DBS
Market Focus
Asia Equity
Page 20
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 20 Sep 2016 11:07:41
Dissemination Date: 20 Sep 2016 11:26:50
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Market Focus
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Wong Ming Tek, Executive Director, ADBSR
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