Russell Asia Market Commentary€¦ · October 10 // Market outlook Russell Investments // Your...

Andrew PeaseChief Investment Strategist, Asia-Pacifi c

Your analysis of recent economic events and market movements

October 2010

Russell Asia Market Commentary

October 10 // Market outlook

Russell Investments // Your analysis of recent economic events and market movements /p2

Table of contents

Market outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

All aboard the good ship QE2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

United States double dip unlikely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

China: Soft landing on track . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Rest of Asia: Inflation pressures building . . . . . . . . . . . . . . . . . . . . . . . . . 5

Equity market valuation: Less compelling . . . . . . . . . . . . . . . . . . . . . . . . 6

Country ranking: China, HK, Singapore and Taiwan preferred, neutral on India, Indonesia and Thailand least favoured . . . . . . . . . . . . . 7

Conclusion: Uncharted waters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Asia ex Japan valuation chart pack . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Asia ex Japan valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Consensus forecast EPS trends by country . . . . . . . . . . . . . . . . . . . . . . 12

Currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14



Market outlook › US economy unlikely

to double-dip…

› …but recovery likely to be sluggish

› Asian economic growth is moderating, China still slowing

› Equity market valuation is neutral

› China, HK, Singapore and Taiwan preferred, neutral on India. Indonesia and Thailand least favoured

Global equity markets have needed to climb the proverbial ‘wall of worry’ so far this year. Investors have had to deal with European government debt problems, double-dip fears for the United States and uncertainty about the extent and duration of China’s economic slowdown. Despite this, the Russell Global Developed share index has returned 4.0% over the first nine months of the year and the Russell Asia ex Japan share index has returned 14.2%.

We do not expect the US economy to slide back into recession; a continued sluggish growth performance seems the most likely outcome. This means sustained low Fed interest rates, low inflation and an unemployment rate stuck above 9%. It also means solid, but unspectacular gains in corporate profits that in combination with reasonable valuations should deliver further sharemarket gains.

In particular, we think fears that the United States could end up like Japan, trapped in a deflationary near permanent state of recession, are overdone. The United States face challenges from further deleveraging as households increase saving and the fiscal deficit is wound back. The Fed, however, is unlikely to repeat the mistakes made by the Bank of Japan (BOJ), which allowed deflation to take hold, never aggressively used quantitative easing (QE) and raised interest rates while consumer prices were still falling. The Fed has signalled that it will move to a renewed phase of QE if inflation and inflation expectations continue to decline. Ben Bernanke, before joining the Fed, wrote about the failures of Japanese monetary policy and we expect that determined Fed policy action can prevent deflation and keep the United States’ economy growing at a trend-like pace.

The China slowdown appears to be progressing in an orderly manner. Credit growth is slowing as planned and the property sector is cooling. Growth seems to be moderating from the break-neck 11.9% in the year to March to a more sustainable 8-8.5%. The ‘hard landing’ for China feared by many seems increasingly unlikely.

Across the rest of Asia, economic growth forecasts continue to be upgraded and inflation appears to have stabilised. The biggest cloud on the horizon is a looming slowdown in export demand. Exports across the region have rebounded by around 60% from their early 2009 lows and are near the previous highs. The major economies are still the biggest customers for Asia’s exports meaning the outlook for export demand is at best lacklustre. The downturn in the G-7 Leading Index is a worrying sign given Asia’s traditional dependence on the global manufacturing cycle.

As we write, global equity and fixed income markets have become positively correlated, rallying on the expectation of renewed QE by the US Fed. Both the Russell Asia ex Japan and Global Developed share indices have returned around 10% over September. This positive correlation should persist for a while longer, if as seems likely, the Fed announces a quantitative easing policy that is targeted at boosting core inflation towards 2%. If successful, however, 10-year Treasury yields at below 2.5% will be unsustainably low and in danger of heading higher once Fed buying support ends. The danger is that equities and bonds might remain positively correlated as bond prices eventually fall.

All aboard the good ship QE2

”We think fears that the

United States could end

up like Japan, trapped

in a defl ationary near

permanent state of

recession, are overdone.”

Figure 1a: G-7 Industrial Production and Leading Index 6 month annualised % change

G-7 Industrial Production Leading Index

1980 1984 19921988 1996 20042000 2008

SOURCE: OECD

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Market outlook continued

According to a survey of forecasters by Consensus Economics, the US economy is expected to grow by 2.7% this year and 2.4% in 2011. This is an exceptionally lacklustre growth outlook given the size of the recession (by way of contrast, the US economy grew by over 7.5% for six quarters following the 1980s recession).

Russell’s US economist, Mike Dueker, is slightly more optimistic than the consensus, expecting 2011 GDP growth of 2.8%. Even this outlook will leave the unemployment rate above 9% and Mike doesn’t think the Fed will consider lifting interest rates until late 2011.

China: Soft landing on track

China, of course, has the opposite problem to the United States – an economy that has been too strong and needs to cool down. Bank lending increased by 32% in 2009, industrial production expanded by 40% and construction activity increased by 43%.

China’s economy has cooled so far this year. Bank lending growth slowed to 19% in the year to August, industrial production growth slowed to 16% and construction activity grew 18%.

Navigating this environment is going to be a challenge over the coming months. For now, we see a positive environment for global equities. Sharemarkets in the developed world still offer reasonable value, especially compared to bond yields. Asia ex Japan valuations, however, are less compelling. While not yet expensive, the region is trading at a premium to the rest of the world on both a price to earnings basis and in terms of price to book value. Now is not the time for an aggressively overweight stance on the region and we recommend that investors stay with their long-term allocations.

United States: double dip unlikely

It is difficult to be optimistic about the US economic outlook given the sorry state of the housing market, consumer deleveraging pressures and a weak labour market. A double-dip recession, while not impossible, seems unlikely. One reason is that the housing sector cannot weaken much further from the current extremely depressed levels. Fewer houses are being built than at any time since at least 1960 (and the population has increased by 130 million since then) – it is difficult to see how starts can fall by much more. Housing is an important driver of the economic cycle because of the consumer durable purchases (carpets, white goods, furniture) associated with newly constructed houses and the wealth and confidence effects from house price movements.

Although housing looks to have hit rock-bottom, a recovery does not seem likely anytime soon. Some estimates suggest that nearly a quarter of outstanding US mortgages are ‘underwater’, meaning that the value of the house is lower than the outstanding loan balance. Foreclosures are likely to be high for some time, keeping the stock of unsold houses at elevated levels.

Another reason why a double-dip seems unlikely is the solid state of US corporate profitability. The earnings per share (EPS) of the S&P500 companies have increased by nearly 30% over the past year. Unfortunately, we may be past the peak in the profit cycle. As figure 1c shows, rising profits helped improve corporate sentiment, but the Conference Board’s quarterly survey of CEO confidence fell to neutral levels in the September quarter, signalling weaker profits growth ahead. Cashed up firms are unlikely to cut back aggressively on employment or spending, but the fall in CEO confidence suggests little likelihood of a sustained rebound in business investment spending. There is little demand for new shopping centres or office towers right now.

Figure 1b: United States Housing Starts

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

SOURCE: Datastream

000’s annual rate

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1500

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Figure 1c: CEO Confidence and S&P 500 Trailing EPS

CEO Confidence (advanced two quarters) Annual EPS growth

1990 1995 20052000 2010

% EPS growth (quarterly average) CEO Confidence Index

SOURCE: I/B/E/S, The Conference Board

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”It is diffi cult to be optimistic about the US

economic outlook... A double-dip recession,

while not impossible, seems unlikely.”



An issue across the region will be how much currency appreciation to allow should central banks in the US, Japan, and the United Kingdom resort to further quantitative easing (which will put downward pressure on their currencies). With export growth set to slow, it is likely that regional central banks will seek to limit the amount of appreciation through increasing foreign reserves. If unsterilized, this will increase domestic credit growth and put further upward pressure on inflation.

The main debate is over whether the economy has slowed by enough and if more tightening measures are required. Consumer price inflation continues to rise, reaching 3.5% in August, up from 1.9% at the beginning of the year. Property prices have flattened out in recent months but remain at high levels and a central bank survey points to widespread expectations for further price gains. In response, the government in late September announced further measures to cool the property sector, banning mortgages for third home purchases and increasing down payment requirements. This comes on top of the three increases to bank reserve ratio requirements and a monthly credit quota announced earlier in the year.

It is going to be an interesting juggling act for policy makers in coming months as they potentially deal with weaker export demand, upward pressure on the renminbi from a falling USD and persistent property market price pressures. Caution is likely to be the guiding principle and policy moves are likely to be modest and gradual.

Rest of Asia: Infl ation pressures building

The forecasters surveyed by Consensus Economics have continued to upgrade their 2010 GDP growth outlooks across the region. Comparing September forecasts to those in June, the biggest upgrades have been 5.4% in Singapore (due to a much larger than expected 2Q GDP outcome), 2.4% in Thailand and 1.6% in Taiwan. Only China has seen downgrades, with the forecast for 2010 GDP growth lowered from 10.2% in June to 9.9% in September.

Exports are now past their peak and have recovered the losses during the crisis. The extent of the export slowdown is the key near-term issue for the regional growth outlook. If, as mentioned earlier, the G-7 Leading Index is correct and global industrial production slows sharply, then we may be in for a period of growth forecast downgrades across the region. The loss of export momentum means there are now more downside than upside risks to regional growth over the next year.

The other issue is the extent of further policy tightening that might be needed to combat inflationary pressures. So far this year there have been interest rate hikes in India, Korea, Thailand, Taiwan and Malaysia. Other countries have tried to cool monetary conditions through changes to reserve requirements (China and Indonesia) and through exchange rate revaluation (Singapore).

Inflation has leveled out over the past few months, which should provide some breathing space for policy makers. Both India and Indonesia, however, face uncomfortably high inflation rates and there is a clear upward trend across most countries over the past twelve months.


Figure 1d: Consensus GDP Forecasts: September 2010

%

SOURCE: Consensus Economics

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IndonesiaMalaysiaThailandTaiwanKoreaSingaporeIndiaHongKong

China

10-Year Average 2009 2010 forecast 2011 forecast

Figure 1e: Exports by Country

China India Indonesia Korea Hong Kong Taiwan Singapore Malaysia

Y/Y% 12 mth ended, 3 mth average

Jan-07 Jul-07 Jul-08Jan-08 Jan-09 Jan-10Jul-09 Jul-10

SOURCE: Datastream

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Figure 1f: Asia ex Japan Inflation

%

1999 2001 2003 2005 2007 2009

SOURCE: Datastream, Russell calculations weighted by free-float market capitalisation

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While Asia looks expensive relative to the rest of the world, it looks fairly valued in absolute terms. The forward PE ratio, at 12.5 times, is in line with the long-term average.

Asia continues to experience a much stronger rebound in projected earnings per share (EPS) than the developed world. The level of 12-month-ahead expected EPS for Asia ex Japan is now 2.5% higher than the previous peak in 2008. By contrast, EPS levels in the developed world are still nearly 20% below their pre-crisis peak.

The strength in Asian EPS is impressive, but it also brings the question of sustainability. Is Asia close to peak cycle earnings and are consensus analyst forecasts for 17% growth in EPS over the next 12 months over-optimistic?

Overall, the growth outlook for Asia is a balance between slowing export growth, strong credit growth and concerns about inflation pressures. Faced with a choice between keeping inflation low or supporting exports by resisting currency strength, we expect that most countries will opt for exports. On balance, we expect to see supportive monetary conditions and upward pressure on inflation against a backdrop of weaker export growth.

Equity market valuation: Less compelling

Asia’s valuation relative to the rest of the world has deteriorated over the past few months. Asia’s forward PE ratio is at a 3% premium to the World compared to the traditional 20% discount.


Figure 1g: Inflation rates

%

SOURCE: Datastream

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IndonesiaMalaysiaThailandTaiwanSingaporeKoreaIndiaHongKong

China

July 2009 July 2010

Figure 1h: Forward PE: Asia ex Japan relative to the World

Ratio

1987 1990 1993 1996 20081999 2002 2005

SOURCE: I/B/E/S

Long term average

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Figure 1i: Forward PE: Asia ex Japan

Times

1987 1990 1993 1996 20081999 2002 2005

SOURCE: I/B/E/S

Long term average

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Figure 1j: Forward EPS Levels: Asia ex Japan versus the World

Index, 2002 = 100

Asia ex Japan Developed World

1987 1990 1993 1996 20081999 2002 2005

SOURCE: I/B/E/S

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Table 1: USD Return Russell IndexUSD Return Russell Index – September 2010 Total Returns

5 years p.a. 3 years p.a. 1 year 6 months 3 months 1 month

Asia ex Japan 13.5 -1.4 22.7 12.1 17.5 11.5

China 20.1 -4.8 19.0 8.2 13.6 10.2

Hong Kong 9.7 -1.5 22.3 11.7 20.3 13.5

India 18.8 2.1 28.8 14.9 15.4 14.3

Korea 8.3 -6.7 15.4 9.8 17.2 12.3

Singapore 14.8 1.2 27.7 16.3 16.8 8.0

Taiwan 9.4 -1.1 15.2 8.8 19.8 10.9

Thailand 17.4 12.8 53.0 33.6 32.3 10.9

Indonesia 29.2 14.2 44.3 24.9 19.5 14.6

Malaysia 17.6 9.2 39.4 18.4 18.0 6.0

Global Developed 2.1 -7.3 8.3 0.2 14.1 9.7



One way to answer this is to look at price to book value (share price divided by the value of tangible assets less liabilities). A high price to book value combined with a low PE ratio can be a signal that a market or region is ‘over-earning’ – the available stock of tangible assets is producing a high level of EPS relative to history, making further gains difficult. Price to book value, at 2 times, is above the long-term average, although still well below the previous peak of near 3 times in 2007.

In summary, Asia’s PE multiple is close to the region’s long-term average and at a premium relative to the World. Price to book value is above the long-term average and EPS growth expectations for the next twelve months may be over-optimistic.

Country ranking: China, HK, Singapore and Taiwan preferred, neutral on India, Indonesia and Thailand least favoured

In our last report, Hong Kong, Singapore and Taiwan were our preferred markets, we were neutral on China and ranked Indonesia last. These recommendations performed moderately well, with Hong Kong and Taiwan outperforming the region, Singapore broadly in line and China an underperformer. Indonesia, however, continued to defy stretched valuations to again outperform the region, returning 19.5% for the quarter compared to 17.5% for the region. The standout performer, however, was Thailand returning 32.3% for the quarter as political tensions eased.

The mixed outlook for growth and more neutral regional valuations make country preferences more challenging. The least preferred markets are easier to nominate – Indonesia and Thailand. Indonesia because it is the most expensive on both a price-to-earnings ratio and price-to-book value basis. Thailand because its valuation metrics are at best neutral and there is the potential for political risk to return.

China is starting to look more favourable on a relative basis. The soft landing is on track, the PE ratio is supportive and price to book value is neutral. Hong Kong is neutral on a PE ratio basis and only slightly negative on price to book value terms. Although Hong Kong’s property market has boomed and there are concerns about overheating, the currency board means that Hong Kong is directly linked to ultra-easy Fed monetary policy. Taiwan stands out on a PE ratio basis. The challenge for Taiwan, however, is the looming slowdown in export demand. It’s a similar story for Singapore where okay valuations are offset by the weaker export outlook and the likelihood of a domestic slowdown after a blistering first half of the year. Korea is attractive on price to book value and neutral on PE ratio terms. It is also exposed to the global export demand slowdown while domestic inflation pressures may bring on more BoK tightening.

India’s mixed valuations (expensive on the PE ratio, cheap on PBV) combined with inflation issues and central bank tightening leave us with a neutral outlook.


Figure 1k: Price to Book Value: Asia ex Japan

Times

1995 1999 20011997 2003 2005 2007 2009

SOURCE: Factset

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1.0

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Figure 1l: Forward PE ratios relative to region* September 2010

%

SOURCE: I/B/E/S * adjusted for 10-year premium/discount

less value

more value

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TaiwanChinaHongKong

SingaporeKoreaThailandMalaysiaIndiaIndonesia

Figure 1m: 1-Year Ahead Forecast EPS Growth

%

SOURCE: I/B/E/S

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HongKong

SingaporeKoreaMalaysiaThailandChinaIndonesiaTaiwanIndia

June 2010 September 2010

Figure 1n: Price to Book Value relative to 8-year average September 2010

%

SOURCE: Factset, Russell calculations

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IndonesiaMalaysiaThailandSingaporeTaiwanHongKong

ChinaKoreaIndia




Conclusion: Uncharted waters

The investment outlook is as complex as it has ever been. Global equity markets offer reasonable value, but the medium term outlook for the major economies is at best lacklustre. We do not think that the US economy is likely to have a double-dip recession or enter a Japan style lost decade of deflation and stalled growth. Markets, however, are likely to worry about these scenarios while the near term growth outlook remains uncertain.

Renewed quantitative easing by the US Fed should be near-term supportive for equity and bond markets as QE seeks to reflate the US economy and reduce long-term interest rates. Longer-term, however, QE creates risks if it is successful in raising inflation expectations. Long-term bond yields, at unsustainably low levels, will come under significant upward pressure once central banks stop buying. Equity markets could be at risk from a sudden rise in discount rates.

Against this backdrop, the outlook for Asian markets is broadly neutral. Export growth momentum appears to have peaked and the period of GDP forecast upgrades is coming to an end. While not yet expensive, Asia is trading at a premium to the rest of the world on both a price to earnings basis and in terms of price to book value. Now is not the time for an overweight stance on the region. But with QE likely to support equity markets globally, now is not the time to be underweight the region either.

October 10 // Asia ex Japan valuation chart pack


Asia ex Japan valuation chart packAsia ex Japan valuation chart pack

The MSCI Asia ex Japan forward PE ratio rose to 12.3 times in September relative to 12 times in July and August. The long-run average is 12.7 times.

Asia’s PE ratio is 3.1% higher than the forward PE ratio for the MSCI developed world index.

Asia typically trades on a 20% discount.

Figure 2a: Forward PE Ratio: Asia ex Japan

Times

1987 1990 1993 1996 20081999 2002 2005

SOURCE: I/B/E/S, MSCI

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Figure 2b: Forward PE: Asia ex Japan relative to the World

Ratio

1987 1990 1993 1996 20081999 2002 2005


0.4

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Figure 2c: Forward PE Ratio relative to MSCI Australia

Ratio

1987 1990 1993 1996 20081999 2002 2005


0.4

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Figure 2d: Forecast EPS Growth: Asia ex Japan

% ann growth forecast

2010 2011 2012

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10


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There’s not much to choose between Asia and Australia on valuation terms. Both are trading on around a 12.5 times forward PE ratio, in line with the long run average.

The consensus estimate for 2010 EPS growth in Asia ex Japan moderated to 39% in September after peaking at 40% in August (versus the January estimate of 29%). The consensus expects EPS to grow by 12% in 2011 and 13% in 2012. The region has generated compound annual EPS growth of 15% since 2001.

› Asia ex Japan forward PE ratio is slightly below the region’s long-term average.

› The consensus estimate for 2010 EPS growth moderated to 39.3% in September after peaking at 40% in August.

› Indonesia is the most expensive on a relative PE ratio followed by India.

› Singapore and Taiwan are the cheapest on a PE ratio basis.

› Every industry sector is trading at a PE ratio premium compared to the World relative to the past 10 years.



Asia ex Japan valuation chart pack continued

Another way to view earnings momentum is to look at the level of expected EPS. It’s also useful for checking the message from the PE ratio. The forward PE ratio will look artificially low if it is based on an unrealistically inflated EPS level.

In March 2009, forward EPS was 45% below the July 2008 peak. It has since increased by 87%. The level of expected EPS is now 2.6% above the 2008 peak.

India has the largest PE ratio premium to the region. Thailand and Korea have large discounts.

These relative PE ratios need to be viewed cautiously, however, given some countries normally trade at premiums or discounts to the broader region. For example, over the past 10-years, HK’s PE ratio has, on average been 29% higher than the regional PE ratio. Korea, by contrast, typically trades at a 26% discount.

Figure 2e: Forward EPS Levels: Asia ex Japan

US$

1987 1990 1993 1996 20081999 2002 2005


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Figure 2g: Forward PE ratios relative to region* September 2010

%


less value

more value

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TaiwanSingaporeChinaKoreaHongKong

MalaysiaThailandIndiaIndonesia

Figure 2h: EPS Growth: Actual & Forecast – September 2010

%


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HongKong

SingaporeKoreaMalaysiaThailandChinaIndonesiaTaiwanIndia

Next 12 months Last 12 months

Figure 2i: PEG ratios: September 2010


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KoreaChinaTaiwanThailandIndonesiaIndiaMalaysiaSingaporeHongKong

Adjusting for the average premium/discount over the past 10 years shows that Indonesia and India are the most expensive and Singapore and Taiwan are the cheapest.

India and Taiwan are expected to deliver the strongest EPS growth over the next twelve months, with Indonesia and China not far behind. EPS growth expectations are still relatively modest in Singapore and Hong Kong.

The PEG ratio is the PE ratio divided by the consensus forecast for 1-year-ahead EPS growth. A high PE ratio can sometimes be justified if earnings are forecast to grow rapidly, implying a low PEG ratio. China and Korea have the most attractive PEG ratios.

Figure 1l: Forward PE ratios relative to region: September 2010

%


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KoreaThailandChinaTaiwanIndonesiaSingaporeMalaysiaHongKong

India




Figure 2j: Relative Forward PE Ratios Asia ex Japan relative to the World*: September 2010

SOURCE: Factset, I/B/E/S, Russell calculations* adjusted for average discount/premium over past 10 years

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Industrials FinancialsITUtilitiesEnergyTelcosConsDiscret

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Figure 2k: Relative Price-to-Book-Value Asia ex Japan relative to the World*: September 2010

SOURCE: Factset, I/B/E/S, Russell calculations* adjusted for average discount/premium over past 7 years

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0102030405060708090

IT TelcosIndustrialsMaterialsEnergyConsStaples

ConsDiscret

UtilitiesFinancialsHealthCare

%

Figure 2j shows the industry breakdown for Asia ex Japan relative to the World. It shows the relative forward PE ratios, compared to the average for the past 10 years. IT, for example, always trades at a low PE ratio relative to the world. This is mostly because IT in Asia is more focused on lower value added manufacturing than higher value added software design. Relative to the past 10 years, Asia’s IT sector is trading at a 19% premium. Every sector in the region is trading at a premium to the World.

A price to book comparison for Asia’s industry sectors relative to the World shows that every sector, aside from Telecommunications, is trading at a premium relative to the past seven years.




Consensus forecast EPS trends by country

Figure 2l: Forecast EPS Growth: China

%

2010 2011 2012



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Figure 2n: Forecast EPS Growth: Taiwan

%

2010 2011 2012



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Figure 2p: Forecast EPS Growth: Hong Kong

%

2010 2011 2012



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Figure 2m: Forecast EPS Growth: Korea

%

2010 2011 2012



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Figure 2o: Forecast EPS Growth: India

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2010 2011 2012



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Figure 2q: Forecast EPS Growth: Singapore

%

2010 2011 2012



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Figure 2r: Forecast EPS Growth: Malaysia

%

2010 2011 2012



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Figure 2t: Forecast EPS Growth: Thailand

%

2010 2011 2012



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Figure 2s: Forecast EPS Growth: Indonesia

%

2010 2011 2012



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Currencies

Figure 2u: Currency Moves Against US$ September 2009 to September 2010

%

SOURCE: Datastream

-10 -5 0 5 10 15

EuroHong Kong

ChinaTaiwan

KoreaIndia

SingaporeYen

IndonesiaThailandMalaysia

Figure 2w: Asia: Official Reserves Accumulation

US$ billion annual growth

China Rest of Asia Japan

1998 2000 2002 2004 2006 2008 2010

SOURCE: Datastream

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Figure 2x: United States: Real Trade Weighted Dollar

real broad effective index

1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

SOURCE: US Federal Reserve

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Figure 2v: Real Trade-Weighted Currencies versus 10-Year Average, September 2010

%

SOURCE: Datastream

Undervalued Overvalued

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Indonesia

Thailand

Singapore

China

Malaysia

India

Taiwan

Korea

Hong Kong

Apart from Hong Kong (with a currency board), regional currencies, including China, have strengthened against the USD over the past year. The biggest gainers have been the Malaysian ringgit, up 12.5% and the Thai baht, which has gained 10.1% over 12 months to September 2010.

Relative to the past 10 years, real trade-weighted exchange rates are:

› Highest in Indonesia, Thailand and Singapore. › Lowest in Hong Kong, Korea and Taiwan.

Since February 2010, Asian Central banks have been reducing their rates of accumulation of foreign exchange reserves. For instance, China’s June YOY accumulation was USD323bn, down from USD513bn in February. As of June, China’s total reserves stood at USD2.45 trillion. Official reserves across the rest of the region were USD1.7 trillion.

The USD depreciated by 3% in real trade-weighted terms in the September quarter. It is now 10% below its long-term average.

Russell Investment Group Pte Ltd.4 Shenton Way 28-01 SGX Centre 2Singapore 068807Tel. +65 6880 5900Email [email protected]/asia

This document is published for information only, and does not have regard to the specifi c investment objectives, fi nancial situation, nor the particular needs of any person. Past performance is not necessarily indicative of future performance. This document is prepared by Russell Investment Group Pte Ltd (Registration no. 199901513K) and is based on information obtained from sources believed to be reliable, but the Russell Investment Group does not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. The Russell Investment Group accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. Copyright 2010 Russell Investments. All rights reserved. MKT/2617/0710 R_ASIA_MKT_Barometer_V1F_1010

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