11-06-2013, 01:20 PM
Investors in Asia run risk of missing upside: Citi
Market generally not hearing the sweet music because of the noise
ByMichelle Quah print |email this article
"CONFUSION reigns, threaded with fear" - that's how Citi Research describes the investment sentiment here in Asia, with the day-to-day "noise" of the markets, ie, the anticipation and reaction, crowding out what it feels should be a longer-term quest for value and sustained returns.
In fact, it says, investors here in Asia are so risk-averse that they are in danger of missing out on the major risk for Asian equities - that of a big rebound.
"Investors in emerging markets used to be at the optimistic end of the spectrum, buoyed by the outlook for growth, profits and ROE (return on equity), and thus for the likely returns on their committed dollars," said Markus Rosgen, head of pan-Asia equity strategy in Citi Research's report, Pan-Asia Road Ahead: 2H13 Outlook.
"Since 2010, though, the relative returns have turned negative and with it the optimism has evaporated: the glass is not only less full but also smaller, especially relative to the mood of developed-market investors. Year-to-date, this is evidenced by the underperformance of risk as an attribute in Asia and of EM (emerging markets) relative to DM (developed markets), even though both comprise roughly the same risk sectors, banks and cyclical," Mr Rosgen added.
He cites three reasons why Citi Research remains optimistic on Asian equity markets in the second half of the year.
Firstly, overall valuations in this region continue to be "really quite attractive".
"In its simplest form, the trailing P/E (price-to-earnings ratio) for Asia-ex (Japan) is now at close to a full standard deviation below the 40-year mean. If we ascribe some wisdom to crowds, the crowd knows that not all is well with the global economy. As such, the downside is clearly something of which few are unaware. So, the risk, given where valuations lie, is not so much to the downside as to the upside."
He also says that Citi Research is not too worried about the corporate earnings revisions that tend to be the biggest in August and September. He expects this year to be no different, but "there are plenty of instances where you have had downward revisions to earnings . . . and yet equity markets have continued to go higher".
"The key reason that they have gone higher is because overall valuations are very cheap . . . At such levels, markets have been able to shrug off downward earnings revisions," he said.
The third and final reason as to why he remains relatively positive is that, "from an economic surprise perspective, we expect that you're going to start to see more economic surprises to the upside in the second half of the year".
"So far, in the first half of the year, it's been the other way round - we've had more disappointing data versus expectations than we've seen for quite a while."
He sees value in growth sensitives and financials - "if a steeper yield curve signals stronger growth, then it should be positive for cyclicals and financials".
Citi Research has its eye on technology and cyclical stocks in Korea and Taiwan, financials in Hong Kong and banks and oil services in Singapore. It is underweight on Australia, China and India, and views Asean as expensive and lacking in cyclical growth drivers.
For Singapore, in particular, Citi Research's preferred stocks include Keppel Corp, Wilmar and Hongkong Land, and "firms with less domestic exposure".
"Stocks we dislike include SMRT and Cosco Corp", it said.
In terms of Singapore's banking sector, in particular, Citi Research issued a separate report, saying the sector continues to look robust for the coming months, with Singapore loan growth having accelerated the most in the first quarter of this year.
It noted that the change in growth rates for most countries in Asia ex-Japan was within -/+ one percentage point, with only Singapore managing a meaningful increase, ie, growth of 3.0 percentage points, from 16.7 per cent in the fourth quarter of last year to 19.7 per cent in the first quarter of this year.
Singapore's strong loan growth "was driven by the domestic property market, intra-regional investment and trade finance (likely China related), but note that the three domestic SG (Singapore) banks are seeing core loan growth of only 10-11 per cent, lower than the system numbers", the report said.
It also noted that loan growth strongly outpaced deposits, with the gap being widest for Singapore at +10.8 percentage points (loan 19.7 per cent vs deposit 8.9 per cent) and Indonesia at +7.7 percentage points.
The report also pointed out that the loan-to-deposit ratios (LDR) in Singapore, Indonesia and India are near an all-time peak.
Singapore's LDR was at 96.5 per cent in the fourth quarter, Indonesia's was at 87.7 per cent, and India's was at 77.8 per cent - their highest since the Asian financial crisis.
Market generally not hearing the sweet music because of the noise
ByMichelle Quah print |email this article
"CONFUSION reigns, threaded with fear" - that's how Citi Research describes the investment sentiment here in Asia, with the day-to-day "noise" of the markets, ie, the anticipation and reaction, crowding out what it feels should be a longer-term quest for value and sustained returns.
In fact, it says, investors here in Asia are so risk-averse that they are in danger of missing out on the major risk for Asian equities - that of a big rebound.
"Investors in emerging markets used to be at the optimistic end of the spectrum, buoyed by the outlook for growth, profits and ROE (return on equity), and thus for the likely returns on their committed dollars," said Markus Rosgen, head of pan-Asia equity strategy in Citi Research's report, Pan-Asia Road Ahead: 2H13 Outlook.
"Since 2010, though, the relative returns have turned negative and with it the optimism has evaporated: the glass is not only less full but also smaller, especially relative to the mood of developed-market investors. Year-to-date, this is evidenced by the underperformance of risk as an attribute in Asia and of EM (emerging markets) relative to DM (developed markets), even though both comprise roughly the same risk sectors, banks and cyclical," Mr Rosgen added.
He cites three reasons why Citi Research remains optimistic on Asian equity markets in the second half of the year.
Firstly, overall valuations in this region continue to be "really quite attractive".
"In its simplest form, the trailing P/E (price-to-earnings ratio) for Asia-ex (Japan) is now at close to a full standard deviation below the 40-year mean. If we ascribe some wisdom to crowds, the crowd knows that not all is well with the global economy. As such, the downside is clearly something of which few are unaware. So, the risk, given where valuations lie, is not so much to the downside as to the upside."
He also says that Citi Research is not too worried about the corporate earnings revisions that tend to be the biggest in August and September. He expects this year to be no different, but "there are plenty of instances where you have had downward revisions to earnings . . . and yet equity markets have continued to go higher".
"The key reason that they have gone higher is because overall valuations are very cheap . . . At such levels, markets have been able to shrug off downward earnings revisions," he said.
The third and final reason as to why he remains relatively positive is that, "from an economic surprise perspective, we expect that you're going to start to see more economic surprises to the upside in the second half of the year".
"So far, in the first half of the year, it's been the other way round - we've had more disappointing data versus expectations than we've seen for quite a while."
He sees value in growth sensitives and financials - "if a steeper yield curve signals stronger growth, then it should be positive for cyclicals and financials".
Citi Research has its eye on technology and cyclical stocks in Korea and Taiwan, financials in Hong Kong and banks and oil services in Singapore. It is underweight on Australia, China and India, and views Asean as expensive and lacking in cyclical growth drivers.
For Singapore, in particular, Citi Research's preferred stocks include Keppel Corp, Wilmar and Hongkong Land, and "firms with less domestic exposure".
"Stocks we dislike include SMRT and Cosco Corp", it said.
In terms of Singapore's banking sector, in particular, Citi Research issued a separate report, saying the sector continues to look robust for the coming months, with Singapore loan growth having accelerated the most in the first quarter of this year.
It noted that the change in growth rates for most countries in Asia ex-Japan was within -/+ one percentage point, with only Singapore managing a meaningful increase, ie, growth of 3.0 percentage points, from 16.7 per cent in the fourth quarter of last year to 19.7 per cent in the first quarter of this year.
Singapore's strong loan growth "was driven by the domestic property market, intra-regional investment and trade finance (likely China related), but note that the three domestic SG (Singapore) banks are seeing core loan growth of only 10-11 per cent, lower than the system numbers", the report said.
It also noted that loan growth strongly outpaced deposits, with the gap being widest for Singapore at +10.8 percentage points (loan 19.7 per cent vs deposit 8.9 per cent) and Indonesia at +7.7 percentage points.
The report also pointed out that the loan-to-deposit ratios (LDR) in Singapore, Indonesia and India are near an all-time peak.
Singapore's LDR was at 96.5 per cent in the fourth quarter, Indonesia's was at 87.7 per cent, and India's was at 77.8 per cent - their highest since the Asian financial crisis.