63_Greed & Fear - Investment Style Shift - 27032014

Christopher Wood [email protected] +852 2600 8516

Thursday, 27 March 2014 Page 1

Investment style shift? Jakarta The most interesting point about Janet Yellens first Fed press conference last week is that the yield curve flattened as monetary tightening expectations were brought forward after Chairwoman Yellens impromptu response to a question when she stated that the Fed may raise rates about six months after ending security purchases. Thus, the 10-year and 30-year Treasury bond yields have fallen by 8bp and 11bp respectively since 19 March, while the 2-year yield has risen by 2bp (see Figure 1). GREED & fear assumes this is not what the new Fed head had intended.

Figure 1 US 30-year and 2-year Treasury bond yield spread

Source: CLSA, Bloomberg

Figure 2 NYSE margin debt balance as % of S&P500 market cap

Source: CLSA, NYSE, Datastream

Meanwhile, the obvious internal divisions within the Fed will become very evident if the American economy fails to accelerate as anticipated following the first quarter weather related lull. If that happens the doves like Yellen will want to end tapering but the hawks will not. But even the so-called hawks will have second thoughts if market action turns decidedly risk off in terms of a further rally in the bond market and a fall in the stock market. GREED & fear certainly remains nervous about the US stock market given that margin debt is near record levels relative to market capitalisation and given that hot sectors like biotech, fuel cells and

260

280

300

320

340

360

380

Jan

13

Feb

13

Mar

13

Apr

13

May

13

Jun

13

Jul 1

3

Aug

13

Sep

13

Oct

13

Nov

13

Dec

13

Jan

14

Feb

14

Mar

14

(bp) 30Y-2Y Treasury bond yield spread

0.5

1.0

1.5

2.0

2.5

3.0

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

(%) NYSE margin debt as % of S&P500 market cap



internet have begun to sell off. Thus, the NYSE margin debt balance rose by 24%YoY to a record US$451bn in January. This is equivalent to 2.8% of S&P500 market capitalisation, compared with a peak of 2.9% reached in 2008 (see Figure 2). Meanwhile, the Nasdaq Internet Index and the S&P500 Biotechnology Index have fallen by 11% and 11.4% respectively since peaking in early March and late February (see Figure 3). As for other hot areas like fuel cell stocks, Plug Power and FuelCell Energy have fallen by 37% and 39% since peaking on 10 March (see Figure 4).

Figure 3 Nasdaq Internet Index and S&P500 Biotechnology Index


Figure 4 FuelCell Energy and Plug Power share prices


This is also an issue for investors in Asia ex Japan. In terms of themes that have been working, last year was very concentrated with, in particular, buy-side concentrated positioning in the likes of Chinese internet and Macau. But of late such themes have also stopped outperforming (see Figure 5). In the case of Chinese internet, there is also the obvious excuse to take profits provided by the pending US initial public offering for Alibaba now scheduled for the third quarter, with talk of a listing valuing the company at US$200bn. While given the parabolic moves that have been seen in some of the Chinese internet names over the past year, stocks can fall a long way and still be in an upward trend technically. Thus, to take the example of Tencent, CLSAs technical analyst Laurence Balanco noted this week that the stock could decline to HK$439, or 31% below its peak price reached in early March and 16% below todays price, and still be in an uptrend (see Figure 6).

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

3,100

3,300

240260280300320340360380400420440

Jan

13

Feb

13

Mar

13

Apr

13

May

13

Jun

13

Jul 1

3

Aug

13

Sep

13

Oct

13

Nov

13

Dec

13

Jan

14

Feb

14

Mar

14

Nasdaq Internet Index

S&P500 Biotechnology Index (RHS)

0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

0

2

4

6

8

10

12

Jan

13

Feb

13

Mar

13

Apr

13

May

13

Jun

13

Jul 1

3

Aug

13

Sep

13

Oct

13

Nov

13

Dec

13

Jan

14

Feb

14

Mar

14

(US$) (US$)Plug Power FuelCell Energy (RHS)



Figure 5 Tencent and Galaxy Entertainment relative to MSCI AC Asia ex-Japan Index

Source: CLSA, Datastream

Figure 6 Tencent share price and 200-day moving average


GREED & fear raises this point simply to highlight the obvious risk of more of a correction. But for those investors less short term orientated GREED & fear still takes the view that Chinese e-commerce remains an exciting growth story where the real issue is who is going to win the competitive battle as all these various players business models now converge on the ubiquitous smart phone, a device owned by seemingly everyone save for GREED & fear and, for now at least, emerging market domestics. By contrast the traditional side of Chinese equities, be it financial stocks, property related stocks or investment-driven stocks such as cement and steel, still face the deflationary risks posed by the overhang of maturing wealth management products (WMPs) coming due later this year and next. The amount of WMPs that will become due is estimated to exceed Rmb2tn in 2H14 and Rmb3.6tn in 2015, according to China Reality Research.

True, the latest negative PMI reading from China this week (see Figure 7) could be the signal that it has become time for renewed easing by Beijing, as seemingly happened last year, even though it would be contrary to the current leaderships rhetorical focus on reform. But GREED & fear is not going to try to play the low quality rally that could result from such a policy move and will remain underweight China. Indeed the underweight in China in the relative-return portfolio will be increased by one percentage point this week with the money added to India

80100120140160180200220240260280

Jan

13

Feb

13

Mar

13

Apr

13

May

13

Jun

13

Jul 1

3

Aug

13

Sep

13

Oct

13

Nov

13

Dec

13

Jan

14

Feb

14

Mar

14

(1/1/13=100)Galaxy Entertainment relative to MSCI AC Asia ex-Japan

Tencent relative to MSCI AC Asia ex-Japan

100

200

300

400

500

600

700

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

Nov

11

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Nov

12

Jan

13

Mar

13

May

13

Jul 1

3

Sep

13

Nov

13

Jan

14

Mar

14

(HK$)

Tencent share price

200-day mov avg



(see Figure 18). There is also the not irrelevant issue that the renminbi has begun to depreciate, a trend that could well continue (see Figure 8).

Figure 7 Markit China Manufacturing PMI

Source: Markit Economics

Figure 8 Renminbi/US$ (inverted scale)


Meanwhile, in terms of country based weightings, GREED & fears guess is that many investors focused on Asia ex Japan began the year overweight the likes of Korea, China and Taiwan on the view that these markets were less negatively exposed to US cyclical recovery and tapering. But so far this year two of the best performers have been Indonesia and India, market moves driven to a significant degree by growing optimism on pending elections. Thus, the MSCI India and Indonesia indices have risen by 5% and 19.5% in US dollar terms so far in 2014, compared with a 1.2% decline in the MSCI AC Asia Pacific ex-Japan Index (see Figure 9). This is a reminder that, in the world of investing in emerging markets, sometimes politics can be the only thing that matters at least in the short to medium term. Since GREED & fear shares the optimism on the forthcoming polls in both countries and since these elections are not about to happen tomorrow, GREED & fear recommends playing the momentum and staying overweight both.

40

42

44

46

48

50

52

54

56

58

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Markit China Manufacturing PMI(50 = no change from previous month)

6.06.26.46.66.87.07.27.47.67.88.08.28.4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Rmb/US$ (inverted scale)



Figure 9 2014 MSCI Asia indices performance in US$ terms


GREED & fear has been in Jakarta this week and it is clear that there is growing confidence that Jakarta Governor Joko Jokowi Widodo will win the presidential election scheduled to be held on 9 July. Indeed in what GREED & fear would view as a sign of somewhat out-of-touch desperation, his chief rival former general Prabowo Subianto of the Gerindra Party felt it necessary to enter a crowded stadium on horseback on Sunday before making a speech characterised by resource nationalism (see Jakarta Post article Prabowo grandstands in his partys military-style rally, 24 March 2014).

Figure 10 Current seat breakdown in Indonesian parliament

Note: Total 560 seats. Source: CLSA, DPR

But if all the momentum is with Jokowi the near term focus is on the parliamentary elections next month where there are rising hopes that PDI-P can win up to 30-35% of the seats in the parliament compared with the partys current 17% (see Figure 10). If this turns out to be the case it would mean that an elected Jokowi, who will be the PDI-Ps candidate in the presidential election, will be much better positioned to manage the legislature. This would in turn give him a much better chance of making progress on infrastructure which, given the end of the commodity boom, is an obvious catalyst required to drive the next growth cycle in Indonesia. This issue is discussed at length in a report published last month by CLSAs head of Indonesia research Sarina Lesmina (Indo infrastructure - Block by block: Technocrats get things rolling, 21 February 2014).

-10

-5

0

5

10

15

20

Indo

nesi

a

New

Zea

land

Phili

ppin

es

Indi

a

Thai

land

Aus

tral

ia

Taiw

an

APX

J

Mal

aysi

a

Sin

gapo

re

AXJ

Hon

g Kon

g

Kor

ea

Chi

na

Japa

n

YTD 2014 MSCI Asia indices performance in US dollar terms(%YTD)

Demokrat26%

Golkar19%

PKS10%

PAN8%

PPP7%

PKB5%

PDI-P17%

Gerindra5%

Hanura3%



The report highlights the positive point that government spending on infrastructure has finally started to rise meaningfully in recent years, increasing from 1.3% of GDP in 2010 to 1.9% of GDP in 2013. It also notes the negative point that Indonesia has one of the highest logistics cost in Asean as a percentage of GDP, based on World Bank methodology. Thus, logistics cost rose from 24% of GDP in 2012 to 27% in 2013 (see Figure 11). Still there are some signs of progress. The hope, if not yet quite the reality, is that a new 727km double-track railway will open in the next few months linking Jakarta and Surabaya. This would be very significant given the absence of an efficient road network across Java. It is also the case that Jokowi has also demonstrated that he can act on infrastructure during his short 17-month tenure as Jakarta Governor. GREED & fear refers to the fact that MRT construction has finally actually commenced in the capital after being a perpetual virtual concept since 1986. The project is Japanese funded.

Figure 11 Logistics costs as as percentage of GDP (2013)

Source: World Bank - State of Logistics Indonesia 2013

Figure 12 Indonesia current account balance

Source: CLSA, CEIC Data, Bank Indonesia

Meanwhile, there has been a revival of investor confidence in Indonesia so far this year as the currency has stabilised in the context of an improvement in the current account primarily caused by weakening imports. Thus, the current account deficit decreased from US$8.5bn or 3.9% of GDP in 3Q13 to US$4bn or 2% of GDP in 4Q13, the smallest deficit since 1Q12 (see Figure 12). Similarly, imports declined by 6.9%YoY in 4Q13 and were down 3.5%YoY in January.

0

5

10

15

20

25

30

Indonesia Vietnam Thailand SouthKorea

Malaysia Japan USA Singapore

(%)

(5)

(4)

(3)

(2)

(1)

0

1

2

3

4

5

(10)

(8)

(6)

(4)

(2)

0

2

4

6

Mar

04

Sep

04

Mar

05

Sep

05

Mar

06

Sep

06

Mar

07

Sep

07

Mar

08

Sep

08

Mar

09

Sep

09

Mar

10

Sep

10

Mar

11

Sep

11

Mar

12

Sep

12

Mar

13

Sep

13

(US$bn) (%GDP)

Indonesia quarterly current account balance

as % of GDP (RHS)



The government projects that the current account deficit should decline this year to an average 2-2.5% of GDP range, compared with last years 3.3%, in the context of real GDP growth running around 5.5%. One reason GREED & fear agrees growth is unlikely to be too weak is because of the holding of parliamentary and presidential elections this year since election spending is a natural positive for consumption. It is certainly the case that the consumption trend has also so far proved remarkably resilient in the context of last years 175bp rise in interest rates, a 44% domestic fuel price hike and rising prices of imported goods because of the rupiahs 21% depreciation against the US dollar in 2013. Thus, real private consumption growth held above 5% QoQ annualised for the ninth consecutive quarter in 4Q13. It would seem to be the case that large wage increases have been a factor here. The Jakarta minimum wage rose by 44% last year and is up 11% this year, while the nationwide average minimum wage was raised by 19% last year and 21% this year. As a result, the average urban wage increased by 18% in 2013 and is projected by CLSAs economics team to rise by 7% this year.

Figure 13 Bank Indonesia consumer confidence index

Source: CEIC Data, Bank Indonesia

Figure 14 Indonesia total system credit growth and consumer credit growth

Source: Bank Indonesia, CLSA

Consumer confidence indicators have also risen in recent months. Bank Indonesias consumer confidence index has increased from a recent low of 107.1 in September 2013 to 116.2 in February (see Figure 13). Still there has been an undoubtedly healthy slowdown in consumer-related lending. While bank credit growth in aggregate decelerated to 20.9% YoY in January, down from 23.1% YoY at the end of 2012, consumer-related credit growth slowed much more

95

100

105

110

115

120

125

Jan

10

Mar

10

May

10

Jul 1

0

Sep

10

Nov

10

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

Nov

11

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Nov

12

Jan

13

Mar

13

May

13

Jul 1

3

Sep

13

Nov

13

Jan

14

Bank Indonesia consumer confidence index

0

10

20

30

40

50

60

FY07 FY08 FY09 FY10 FY11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

(%YoY) Total Consumer



rapidly to 11% YoY in 4Q13, down from 45% YoY in 4Q12 (see Figure 14). Consumer related loans now account for 22% of total bank loans.

Meanwhile, to return to the infrastructure theme, it is clear to GREED & fear and everyone else that, in order to finance infrastructure, the government has to cut energy subsidies further if it wants to retain its long self-imposed fiscal deficit target of 2.5% of GDP. There is room to cut since there is still, despite last years cut, a 40% gap between the market fuel price and the subsidised price. The ideal policy would be some sort of self-adjusting mechanism linking local fuel prices to the global price. A positive point is that Jokowi has made it clear during his time as Jakarta governor that he is in favour of cutting fuel subsidies which mainly favour relatively affluent owners of private cars.

If politics is for now a positive catalyst for Indonesia and India, the opposite applies for Thailand where there still at present appears to be no prospect in sight for an end to the political standoff, with the Constitutional Court declaring last Friday that the 2 February election was null and void. The issue has now become whether the opposition Democrat Party will agree to contest the next election due to be held around May or June this year. A decision not to take part would clearly be negative. In a further blow to the government, the Constitutional Court also ruled earlier this month that the Bt2tn infrastructure bill was illegal because it required off budget financing. This has removed a further potential support for an economy which has clearly been negatively impacted by politics.

Figure 15 Cumulative foreign net buying of Thai stocks

Source: Bloomberg

These decisions are signs that the strategy of the anti-Thaksin opposition has increasingly moved from demonstrations in the streets to using the courts to squeeze the Yingluck government. Meanwhile, amidst all the continuing uncertainty and related economic fallout, it is remarkable how resilient the Thai stock market has been so far this quarter despite Bt27bn of net selling by foreigners year to date (see Figure 15). Thus, the MSCI Thailand Index has risen by 4.5% in US dollar terms so far this quarter, compared with a 1.2% decline in the MSCI AC Asia Pacific ex-Japan Index (see Figure 16). Still to hedge the real risk that the Democrats do not take part in the next general election and that a confrontation is now looming on the streets between red and yellow shirts, GREED & fear will reduce the overweight by one percentage point and add further to India where the BJPs Narendra Modi, like Jokowi, continues to run strongly in the polls and where the relative-return chart is looking increasingly compelling (see Figure 17). On the point of a potential looming confrontation in Thailand, the red shirts last week appointed a more hawkish leader Jatuporn Prompan, who has vowed to assemble all red shirts in a rally supporting Yingluck on 5 April.

300

500

700

900

1100

1300

1500

1700

(180)(150)(120)(90)(60)(30)

0306090

120150

2007 2008 2009 2010 2011 2012 2013 2014

Cumulative foreign net buying of Thai stocksThai SET Index (RHS)

Bt bn



Figure 16 MSCI Thailand relative to MSCI AC Asia Pacific ex-Japan


Figure 17 MSCI India relative to MSCI AC World Index


Meanwhile, the Achilles heel for the current caretaker Yingluck government remains the sheer scale of the misconceived rice subsidy scheme with Bt130bn (US$4bn) now owed to farmers. In another sign of the courts being used against the current government, the National Anti-Corruption Commission (NACC) confirmed in February that Prime Minister Yingluck would be formally charged and required to defend herself against allegations that she had ignored evidence of worsening losses and corruption in the rice-pledging scheme. The end game of this exercise could be an impeachment process, according to CLSAs head of Thai research Suchart Techaposai. An impeachment requires a vote of three fifths of the Senate, a body of 150 people of whom only 77 are elected. This would be the first such impeachment in Thai history.

Meanwhile, aside from using the courts, the goal of the anti-Thaksin group continues to be to try and discredit the Thaksin camp with its own supporters, most particularly the rice farmers. But whether the farmers will blame the government or the anti-government demonstrators for their failure to get paid remains unclear. On this point, the current technical caretaker status of the Yingluck government remains relevant. This is because under the Constitution caretaker governments are not allowed to raise money which creates commitments and liabilities on the future government. This is why the Yingluck government has not been able to pay all the rice farmers.

90

100

110

120

130

140

150

160

170

180

190

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

Nov

-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep

-12

Nov

-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep

-13

Nov

-13

Jan-

14M

ar-1

4

(1/1/10=100)MSCI Thailand relative to AC Asia Pacific ex-Japan

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan

10M

ar 1

0M

ay 1

0Ju

l 10

Sep

10

Nov

10

Jan

11M

ar 1

1M

ay 1

1Ju

l 11

Sep

11

Nov

11

Jan

12M

ar 1

2M

ay 1

2Ju

l 12

Sep

12

Nov

12

Jan

13M

ar 1

3M

ay 1

3Ju

l 13

Sep

13

Nov

13

Jan

14M

ar 1

4

MSCI India / MSCI AC World 200-day mov avg



But while it is evident why the yellow-shirt camp badly needs to discredit Thaksin, it is far from clear that the anti-Thaksin camp is confident that it can win an election given that pro-Thaksin parties have won the past four elections. This is why there is a real risk to GREED & fear that the Democrats decide not to contest the next election. Still may be the sanguine Thai stock market knows something GREED & fear does not.

Finally, a few adjustments will be made to the Asia ex-Japan long-only portfolio this week. The investment in IndusInd Bank and Zee Entertainment will be increased by two percentage points and one percentage point respectively. These investments will be paid for by removing the existing investment in Nestle India (see Figure 19).

Figure 18 CLSA Asia Pacific ex-Japan asset allocation

Source: CLSA, MSCI

Figure 19 Asia ex-Japan thematic equity portfolio for long-only absolute-return investors

Note: Readers should refer to the relevant CLSA research reports for detailed analysis & disclosures. Source: CLSA

MSCI AC Asia Pacific ex-Japan

weightings 26-Mar-14

CLSA recommended

weightings 27-Mar-14

Mismatch from current

benchmark

Australia 26.2% 10.0% -16.2%China 17.9% 15.0% -2.9%Hong Kong 9.2% 7.0% -2.2%India 6.3% 12.0% 5.7%Indonesia 2.5% 5.0% 2.5%Korea 14.8% 15.0% 0.2%Malaysia 3.7% 4.0% 0.3%New Zealand 0.4% 0.0% -0.4%Philippines 0.9% 9.0% 8.1%Singapore 4.8% 3.0% -1.8%Taiwan 11.2% 13.0% 1.8%Thailand 2.1% 3.0% 0.9%Vietnam -- 4.0% 4.0%Total 100.0% 100.0% --

Asean auto dealer 3% Kolao Holdings

Australia gold mining 5% Newcrest Mining

China internet hosting 3% 21Vianet

China internet media 5% Tencent

China online retailer 5% Vipshop

China online-offline travel company 3% Ctrip

Hong Kong consumer 4% Chow Tai Fook

Macau entertainment 4% Galaxy

India consumer 8% Titan Industries (4%), Godrej Consumer (4%)

India banks 9% HDFC Bank (4%), IndusInd Bank (5%)

India housing finance 7% HDFC (4%), GRUH Finance (3%)

India media 4% Zee Entertainment

Korea healthcare 3% i-Sens

Philippines banks 10% Metrobank (5%), BPI (5%)

Philippines consumer 5% Universal Robina

Philippines media 4% ABS-CBN

Singapore dividend plays 5% SATS

Taiwan tech component makers 4% MediaTek

Thailand property 4% Land and Houses

Thai telecoms 5% Intouch (Shin Corp)



Research subscriptions To change your report distribution requirements, please contact your CLSA sales representative or email us at [email protected]. You can also fine-tune your Research Alert email preferences at https://www.clsa.com/member/tools/email_alert/.

Key to CLSA/CAST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be negative. For relative performance, we benchmark the 12-month total forecast return (including dividends) for the stock against the 12-month forecast return (including dividends) for the market on which the stock trades. We define as Double Baggers stocks we expect to yield 100% or more (including dividends) within three years. 2014 CLSA Limited (for research compiled by non-Taiwan analyst(s)) and/or Credit Agricole Securities Taiwan Co., Ltd (for research compiled by Taiwan analyst(s)). Note: In the interests of timeliness, this document has not been edited. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/communication. CLSA group of companies (excluding CLSA Americas, LLC) (CLSA), Credit Agricole Securities Taiwan Co., Ltd. (CA Taiwan), CLSA/CA Taiwan's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research reports and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of CLSA, CLSA Americas, LLC and CA Taiwan only and do not reflect those of CITIC Securities International Company Limited, Credit Agricole Corporate & Investment Bank and/or their respective affiliates. If investors have any difficulty accessing this website, please contact [email protected] or +852 2600 8111. If you require disclosure information on previous dates, please contact [email protected] IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group (18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone +852 2600 8888) and/or CA Taiwan Compliance (27/F, 95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone +886 2 2326 8188). 01/01/2014

Documents

63_Greed & Fear - Investment Style Shift - 27032014