Credit Suisse’s global emerging markets and
Asia-Pacific strategist, Sakthi Siva, believes that Asian markets are undervalued and will soar next year, as they have already priced in a recession in the developed
Western economies, according to a press conference held last week.
Siva said that the price to book ratio for
Asia-Pacific had already fallen to 1.52 times, close to the 1.4 times
level reached during the 2001 recession. She noted that Asian balance sheets
were strong, with the region’s gearing (net debt to equity ratio) having fallen
from a high of 47 per cent in 1998 to an expected 23 per cent for 2011.
Strong gains ahead
Siva discussed the impact of the Eurozone
debt crisis on Asia, noting that there was a -0.89 correlation between Euribor
spreads - the difference between the Euro interbank offered rate and overnight
index swaps – and the MSCI Asia ex-Japan Index.
In other words, there has been a very strong
correlation between increases in European banks’ cost of short term funding and
declines for Asian equities, and vice-versa. However, Siva also pointed out
that most of the seven double-dip recession indicators followed by her team
point towards a soft landing for the global economy.
Focusing on peaking inflation rates and
monetary policy easing as a key driver for Asian equity performance in 2012, Siva
said that Consumer Price Index gains had peaked across global emerging
markets in June. She saidCredit Suisse expects CPI to slow further in the
next few months and central banks in Indonesia and Australia
have already begun to cut rates, while China has started reducing the Reserve
Ratio Requirement for its banks. With the RRR at a record high of 21 per
cent, Siva observed that China had plenty of room for policy easing and that
previous RRR cuts had been associated with strong gains for Chinese equities.
Looking at the equity investment implications
of the macro environment, Siva said companies with a structural growth and
return on equity story would be a natural choice for investors at the moment.
However, she pointed out that many well-known companies of this kind traded at
a substantial premium to the rest of the region, and argued that companies with
a trend of rising return on equity were more attractive.
Siva suggested Keppel,
COLI, Cheung Kong and TSMC as examples of stocks with rising return on equity,
and said that Kia and Hyundai Motors also offered value as these companies were
gaining market share.
Siva also said she preferred “trough
valuation stories,” or stocks where the absolute price to book ratio is at the
lows of 2008 or 2009, and which trade at a discount according to Credit
Suisse’s price to book versus return on equity valuation model. Stocks in this
category include COLI, China Mobile, Bank of China, China Construction Bank,
Industrial and Commercial Bank of China, Hang Seng Bank, POSCO, Cheung Kong,
UOB, Sun Hung Kai, Hyundai Heavy, BHP Billiton and Rio Tinto.