Following a large number of meetings in Asia and the US, we find a great deal of
uncertainty among equity investors regarding the prospects for Asian equity markets
and therefore what actions to take in the wake of sharp August declines and
subsequent swift rebounds. We continue to think markets remain vulnerable to
retracing some of their recent gains if 2008 EPS growth estimates are revised down
due to US consumer weakness. However, the chances for a 4Q rally, potentially off a
lower base, are stronger now given evidence of conservative investor positioning and
the likelihood that the Fed will move into easing mode.
We organize our thinking about Asian regional equity market prospects around five main
considerations:
(1) The strategic case for Asia remains in place;
(2) There will likely be downward revisions to 2008 EPS growth for parts of Asia given
downside risks to US consumption;
(3) Markets have rebounded swiftly from mid-August lows, raising the risk of a reset if
earnings estimates start to be cut; however
(4) Investor positioning appears quite conservative now, following the August market
turbulence, so the ‘pain trade’ is again to the upside; and
(5) The Fed is likely to commence an easing cycle that may cushion the downside risks to
US growth and result in Asia being the unintended beneficiary of more accommodative
monetary policy.
Combining these various leit motifs, the prospects for a 4Q rally, potentially off a lower
base, appear better now than they did several weeks ago. We continue to think that the
key investment criteria will be the level and visibility of earnings growth: stocks that offer
good growth potential with low probability of disappointment are likely to be in demand,
particularly if EPS growth globally is in scarcer supply in 2008. This leads us to emphasize
secular and domestic demand themes and to be cautious on US-sensitive areas, such as
technology and autos. Our market preferences are China, India, Indonesia, Singapore and
Hong Kong, and we remain more cautious on Taiwan and Korea.
