Friday, September 7, 2007

Citi Regional Strategy: The Asia Investigator

Fed Cuts: What You Pay Determines What You Get (by Markus Rosgen)

  • Since 1980 we’ve had 7 Fed cuts, 2 at current valuations; both times markets fell — During the five periods of Fed easing when markets rose, the P/BV averaged 1.2 times. The two periods when markets fell, P/BV averaged 2.3x. P/BV is currently 2.6x. We are at a 116% premium valuations to periods when markets rose and a 13% premium to levels when markets historically fell by 1/3. 
  • Interest sensitives and consumers outperform — Even though these sectors do well, they are amongst the least well owned by Asian investors. The biggest underweights are still banks, the utilities and the telecoms sectors. Ditto Korea, Taiwan and Thailand, which are relative outperformers. Only Thailand is an overweight. Korea and Taiwan remain investor underweights.
  • A falling OECD indicator is bullish, not a rising one — Whenever the OECD leading indicator has been falling and the Fed has cut, Asian markets have risen. The indicator is currently rising on a year-on-year basis. Historically this has been negative for returns. Composite valuations and earnings yield gap models are still elevated and witnessed Fed rate cuts only once at these levels.
  • Peak valuations since 1975 are 19% away — US markets and European markets peaked in 2000 when valuations reached 3 stdev above mean on either P/BV or P/E. Asia ex is 19% away from reaching 3 stdev above mean.

 

China: Delay in individual QDII – short-term consolidation expected (by Lan Xue)

According to one of China's most influential financial magazines, Cai Jing, the Chinese government is undertaking a more detailed study of the individual QDII scheme before letting domestic retail investors rush into the HK stock market.

India: Fed cuts generally good for Indian markets as well (by Ratnesh Kumar)

Bar the period when the tech bubble burst and earnings collapsed, the Indian market has done very well for 12-24 months after Fed rate cuts. As we do not see an earnings collapse in India even in our worst-case scenario, due to its broad-based economic growth (current forecast 17% ex-oil earnings growth for FY08 and FY09), Fed cuts will likely be supportive of our positive view on India equities.

Thailand: Fundamental analysis meets Quants (by Nithi Wanikpun)

Stars (cheap with strong momentum) are RATCH, ATC and TTA. Note that ATC has been a Star since April 2007. Sell-rated EGCO is in our Stars list due to continued earnings upgrade momentum.

Fun With Flows: Global funds underweight Asia for first time in six years (by Elaine Chu)

Global funds have been well positioned to cope with the current market turmoil. Besides, fund managers trimmed regional weights in Europe and the U.S. by a total 220bps in end-July. Cash weights were raised from 2% to an above-avg 3.8%.