GLOBAL What caught my eye? v - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2017/5/12/c3c4f71e-4fc9-4ce9-… · Macquarie Research What caught my eye? v.75 12 May 2017 2 Mixed fortunes

Please refer to page 25 for important disclosures and analyst certification, or on our website

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GLOBAL

Inside

Mixed fortunes – ‘Dr Jekyll & Mr Hyde’ 2

Structural reforms & their discontents 13

Fundamentals vs. Liquidity 16

Appendices 20

Domestic Equity Mutual Fund flows: net INR1.6trn since election of BJP/Modi Govt…

Source: SEBI, CEIC, Macquarie Research, May 2017

Foreign Equity flows: … foreigners returned after being net sellers

Source: SEBI, CEIC, Macquarie Research, May 2017

Analyst(s) Viktor Shvets +852 3922 3883 [email protected] Chetan Seth, CFA +852 3922 4769 [email protected]

12 May 2017 Macquarie Capital Limited

What caught my eye? v.75 India: is it more than just liquidity? In this issue we ask why we remain overweight India. It is one of the best EMs

YTD and (as usual) its EPS estimates and multiples are high, so why invest?

India continues to present a mixed macro-economic picture. On the positive

side, demonetization turned out to be far less damaging than expected, with

ingenuity of India’s private sector rescuing the Government from a potentially far

deeper hole. Whether one looks at consumption, motor vehicle sales or domestic

liquidity, normality has been restored. Also, the focus on agriculture and debt

write-offs did not come at the cost of public infrastructure, with significant

increase pencilled-into FY’18 budget. The economy remains resilient, and

although doubts remain whether new numbers overstate real growth rates, India

remains one of the few EMs that is able to deliver ~10%+ nominal GDP growth.

On the negative side, banking sector remains stressed, with no obvious solutions

in sight, while the corporate sector is devoting up to 35% of gross profit to pay

interest on debt. The combination of low capacity utilization and over leveraging

is precluding any meaningful pick-up in private sector investment. Hence, India

continues to over-consume and under-invest. There is also no evidence of any

meaningful pick-up in manufacturing, while the services backbone is weakening.

Although we were never bullish on the prospects for Modi Government structural

reforms and viewed excitement of ‘14/15 as a form of collective hallucination,

neither do we see any sustained structural agendas in other EMs, with not much

emerging from such potential candidates as Indonesia, Thailand, Mal or China,

while some countries seem to be in danger of reversing (Mexico, SA and Phil). In

this context, India’s introduction of a GST tax (which for the first time has the

potential to create an integrated national economy) and robust usage of

technology to bypass bureaucracy and create a basis for less corrupt distribution

of services and subsidies are steps in the right direction. Even demonetization

might ultimately lead to a wider taxation net while lowering corruption. Limited

progress on deep structural reforms is not unexpected (as domestic reforms are

genuinely hard), but India is progressing at a far more robust pace than most.

The promise of structural reforms is complemented by India’s stable

macro outlook and contained inflation. India remains the beneficiary of the

current global ‘goldilocks’, with China-driven reflation balanced by global CBs

that are keeping global liquidity, US$ and commodities broadly pinned down in

the middle of the range. This continues to reduce India’s external vulnerabilities.

Although fragilities remain, so long as commodities do not shift aggressively (up

or down) and the US$ remains in a neutral gear, the Government maintains

freedom of decision making (fiscal and monetary). At the same time, India’s

domestic liquidity continues to swell; confidence remains high while India’s

exposure to any potential global trade dislocation remains one of EMs lowest.

Our overweight on MSCI India is therefore not predicated on expectation of an

accelerated pay-off from structural reforms or rapidly rising fixed investment, and

we continue to regard ‘Make in India’ campaign as a distraction; neither is it

based on EPS estimates that remain high (~19%) or multiples (17x-18x). We are

in India because it is one of the few global and EM economies that is capable of

delivering growth and productivity gains with a stable macro outlook and limited

external vulnerabilities. We are also in India because it is a domestic economy,

populated by a plethora of solid corporates and finally, we believe that strong

domestic liquidity is more secular rather than cyclical in nature and should be

supported by the Government’s structural agenda and demonetization.

-110,000

-80,000

-50,000

-20,000

10,000

40,000

70,000

100,000

130,000

Jan

-09

Jun

-09

No

v-0

9

Ap

r-1

0

Sep

-10

Feb

-11

Jul-

11

De

c-1

1

May

-12

Oct

-12

Mar

-13

Au

g-1

3

Jan

-14

Jun

-14

No

v-1

4

Ap

r-1

5

Sep

-15

Feb

-16

Jul-

16

De

c-1

6

Mutual Funds Equity : Net Purchase/Sales (INR mn)

BJP/Modi Govt

-4,000

-2,000

0

2,000

4,000

6,000

8,000

Jan

-09

Ap

r-0

9Ju

l-0

9O

ct-0

9Ja

n-1

0A

pr-

10

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1Ju

l-1

1O

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Jul-

12

Oct

-12

Jan

-13

Ap

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3O

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3Ja

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Jul-

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Oct

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Jan

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6A

pr-

16

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Net FII Investment in Equities (USD mn)

Macquarie Research What caught my eye? v.75

12 May 2017 2

Mixed fortunes – ‘Dr Jekyll & Mr Hyde’ India’s economy is continuing to present a very mixed picture. While on the one hand, it had

exhibited a much greater than expected resilience to sudden and poorly co-ordinated

demonetization, on the other hand, the key bottlenecks and issues surrounding India’s

economy remain just as imbedded and difficult to solve as they were in the past.

‘Dr Jekyll and Mr Hyde’ - …there some very good, good…

Starting with demonetization, it is becoming clear that RBI is well on track replacing

roughly 86% of currency in circulation that was subject of demonetization (or

withdrawal of INR500 and INR1000 notes and their replacement with brand new INR500 and

INR2000 notes). By Mar’17, value notes and coins were back to INR13.5 trillion (vs. low of

INR9.4 trillion in Dec’16 and pre-demonetization levels of around INR17-18 trillion). This

clearly partly excludes a portion of India’s shadow economy (around 20%-25% of GDP).

Given the close relationship between the official and unofficial sectors, RBI might need to at

least partly compensate for the money that was never properly assessed in the first place. As

expected (and probably more than was anticipated at the outset), cash was deposited into

various forms of deposits, with on the call deposits with Banks and Post Office rising from

INR12.9 trillion to INR15.2 trillion, while time deposits with Banks increased from INR96

trillion in Oct’16 to INR101.5 trillion in Mar’17.

As a result, the overall level of M2 is almost back to levels prevailing pre-demonetization

while M3 exceeded the levels of Oct’16 by Feb’ 17. Given India’s high level of currency in

circulation to GDP (prior to demonetization, it stood at around 12% vs. levels closer to 2%-3%

for countries like Brazil and South Africa and around 8%-9% for China and Russia and

compared to most developed countries that are closer to 1%-2%), one of the objectives was

clearly to bring as much cash out of the shadows as possible but also increase penetration of

banking, credit and digital products. In that respect, it is quite possible that cash might not

need to continue increasing at a pace that prevailed prior to demonetization, and perhaps

cash in circulation could settle at closer to 9%-10% of GDP. In many ways this will be

contingent on the extent to which the role of shadow economy erodes over time.

Another clear objective of demonetization was an attempt to widen India’s taxation net. The

Heritage Foundation currently estimates that India’s Government tax burden is approximately

16.6%, which remains somewhat low when compared to EM average of closer to 20%-21%.

The hope is that demonetization would improve audit trails and somewhat diminish

opportunities for stashing cash within India’s vast and complex shadow economy.

All of the above are clearly nothing more than hopes, as opportunities for corruption and

tax avoidance are built into India’s political and social fabric, and hence, apart from

causing a temporary dislocation, life could return back to ‘normal’. In the absence of changes

to political rules and donations as well as without significant simplifications of India’s

notoriously complex and byzantine regulatory and taxation systems, the incentives are still

very much stacked in favour of corruption and tax avoidance rebounding.

Fig 1 India – Notes vs. ST deposits (INR trillion) Fig 2 India – M2 and M3 absolute levels (INR trillion)

Source: CEIC; Macquarie Research, May 2017 Source: CEIC; Macquarie Research, May 2017

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Jan-1

5

Mar-

15

May

-15

Ju

l-1

5

Se

p-1

5

Nov-1

5

Jan-1

6

Mar-

16

May

-16

Jul-1

6

Se

p-1

6

No

v-1

6

Ja

n-1

7

Mar-

17

Notes & Coins Deposits

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

20.0

21.0

22.0

23.0

24.0

25.0

26.0

27.0

28.0

29.0

30.0

Jan-1

5

Ma

r-1

5

Ma

y-1

5

Ju

l-1

5

Se

p-1

5

Nov-1

5

Jan-1

6

Mar-

16

May

-16

Jul-1

6

Se

p-1

6

Nov-1

6

Jan-1

7

Ma

r-1

7

M2 M3, rhs

India’s economy is

continuing to

present mixed

picture

On a positive side,

demonetization is

largely behind us

and…


12 May 2017 3

Fig 3 India – Cash in Circulation to GDP (%) Fig 4 EMs – Tax Burden (% GDP) – 2016/17

Source: CEIC; Macquarie Research, May 2017 Source: Heritage Foundation; Macquarie Research, May 2017

However, in the meantime, the economy is recovering from the initial shock. This can

be seen from a number of measures, such as motor vehicles and two-wheeler sales as well

as personal consumption levels. As can be seen below, total motor vehicle sales increased

from the low of 1.2m in Dec’16 (down from 2.2m in Oct-Nov’16) to almost 1.9m by Mar’17.

Similarly, sale of two-wheelers (one of the best gauges of India’s rural demand), which

collapsed in Dec’16 to only 0.9m (from 1.9m in Oct’16), rebounded to ~1.5m by Mar’17.

Fig 5 India – Motor Vehicle Sales Fig 6 India – Two Wheelers Sales


The same message of recovering economy is evident when we examine consumption, with

personal consumption rising by 10% in 4Q2016 vs. 5% in 3Q2016. The Government

consumption had in many ways carried the economy through a tough patch, with

Government-sponsored consumption accelerating massively towards the end of 2016 (rising

by almost 20%). The Government also pencilled in a significant increase in budgeted public

sector infrastructure investment, with expenditure rising to INR3.96 trillion in the year to

Mar’18 vs. INR2.2 trillion in Mar’17, whilst continuing with overall fiscal deficits that are likely

to remain within 3.5% of GDP. Even if we include state deficits, it is likely that the investment

drive should be maintained while keeping overall deficits at below 6.8% of GDP.

The global ‘goldilocks’ (i.e. neither commodities nor US$ being too high or too low) is also

keeping India’s current account exposures within contained bounds (around 1%-2% of GDP

vs. levels closer to 5% of GDP in 2013), and, assuming that we are correct that recent global

reflationary wave (prompted by a mix of China’s stimulus and an ongoing increase in Central

Banks’ liquidity) crested in Mar’17, both CPI and WPI are likely to remain within RBI’s limits

(4%-5%), implying that the Central Bank is likely to remain a neutral gear.

At the same time, FDI inward flows, though still less than a quarter of China’s levels, remain

steady at an annualized clip of ~$40-45bn per annum (or around 1.8%-2.0% of GDP), far

greater than traditional India’s FDIs of under US$10 bn per annum through 1990s-early 2000s.

It seems that combination of global excess of capital that is desperately looking for home and

the promise of reforms is drawing increasing flow of sticky direct investment to India.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Ma

r-0

4

Se

p-0

4

Ma

r-0

5

Se

p-0

5

Ma

r-0

6

Se

p-0

6

Ma

r-0

7

Se

p-0

7

Ma

r-0

8

Se

p-0

8

Ma

r-0

9

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p-0

9

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r-1

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1

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r-1

2

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r-1

3

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4

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p-1

4

Ma

r-1

5

Se

p-1

5

Ma

r-1

6

Se

p-1

6

Ma

r-1

7

Cash in Circulation to GDP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Bra

zil

Tu

rke

y

Kore

a

SA

Mexic

o

Chin

a

Vie

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Ind

ia

Thaila

nd

Ma

lay

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Phili

ppin

es

Ind

on

es

ia

Tax Burden

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

Ja

n-1

3

Apr-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

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14

Ja

n-1

5

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Ju

l-15

Oct-

15

Ja

n-1

6

Apr-

16

Ju

l-16

Oct-

16

Ja

n-1

7

Motor Vehicle Sales Domestic (Cars, 2W, CVs, UVs)

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Ja

n-1

3

Ap

r-1

3

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6

Ap

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6

Ju

l-1

6

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t-1

6

Ja

n-1

7

Two-Wheelers Sale

…economy is

recovering from

initial shock…

…whether we look

at motor and two-

wheeler sales,

consumption or

liquidity

Global ‘goldilocks’

is also containing

inflationary and

fiscal pressures

while…


12 May 2017 4

Fig 7 India – Current Account Deficit (US$ m) Fig 8 India – Inflation (CPI & WPI) (%)


Fig 9 India – Foreign Direct Investment (US$ bn) Fig 10 India – Quarterly FDI (Inward) (US$ m)


As a result, India’s external vulnerability ratios continue to improve. As discussed in our

prior reviews, we use a matrix of six key vulnerability points and then assess EMs relative

rankings on the basis of Z-scores (or distance from the mean). While in 2013 India was one of

the most vulnerable markets in Asia ex Japan (and indeed globally), it is now consistently

scoring at the lower end of vulnerability spectrum. While clearly not as secure as China,

Taiwan or the Philippines, India now scores in line with Thailand and has better scores than

Malaysia, Indonesia, South Africa, Turkey or Central and Eastern Europe.

Fig 11 Macquarie – EM Vulnerability Matrix – 2016/17

Source: IMF; JEDH; Macquarie Research, May 2017

-35,000

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-5,000

0

Ju

n-0

9

De

c-0

9

Ju

n-1

0

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-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Ap

r-0

5

Oc

t-0

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Ap

r-0

6

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7

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4

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t-1

4

Ap

r-1

5

Oc

t-1

5

Ap

r-1

6

Oc

t-1

6

WPI CPI

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

5

10

15

20

25

30

35

40

45

50

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

FDI % of GDP

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jun

-09

De

c-0

9

Jun

-10

De

c-1

0

Jun

-11

De

c-1

1

Jun

-12

De

c-1

2

Jun

-13

De

c-1

3

Jun

-14

De

c-1

4

Jun

-15

De

c-1

5

Jun

-16

De

c-1

6

Inward FDI, US$mn FDI (cumlt, 4Q sum) (RHS)

Country Gross ext

debt (as % of

GDP)

Short term ext

debt as % of

GDP

Reserves to

short-term

external debt

Months of

reserves/

Import cover

Current

Account

Balance

Fiscal balance

as % of GDP

Brazil 38% 3% 6.6 21.4 -1.3% -9.1%

China 12% 8% 3.5 17.1 1.6% -3.3%

Czech Republic 71% 36% 1.3 8.2 1.1% -0.6%

India 20% 4% 4.3 9.0 -2.0% -6.6%

Indonesia 34% 5% 2.8 8.5 -2.3% -2.6%

Korea 27% 8% 3.5 8.3 5.9% 1.1%

Malaysia 67% 28% 1.1 5.4 1.5% -3.0%

Mexico 39% 5% 3.1 5.0 -2.8% -3.0%

Philippines 24% 5% 5.6 9.2 1.4% -1.5%

Poland 72% 11% 2.2 5.8 -1.0% -2.9%

Russia 41% 4% 7.4 16.9 3.5% -1.5%

South Africa 51% 10% 1.4 5.4 -3.2% -3.9%

Turkey 55% 14% 0.9 4.9 -5.6% -1.6%

Hungary 122% 11% 1.9 2.9 4.6% -2.7%

Thailand 34% 13% 3.3 9.3 7.7% -0.4%

Taiwan 33% 31% 2.7 18.4 14.4% -1.3%

…reducing India’s

external

vulnerabilities


12 May 2017 5

Fig 12 EM – Vulnerability Z scores Fig 13 EM – Vulnerability Z scores & Ranking

Source: IMF; JEDH; Macquarie Research, May 2017 Source: IMF; JEDH; Macquarie Research, May 2017

However, the above positives continue to be offset with a heavy dose of negatives and

uncertainties.

….and also bad and quite ugly signals but…

The same weaknesses that in the past bedevilled India’s economy are still as powerful.

India continues to over-consume and under-invest, with the Government support

schemes and spending fostering consumption and spending rather than saving and

investment. India’s saving rates remain stuck at around 29%-30% of GDP, and indeed had

eased back somewhat over the last several years, which limits investment to no more than

30%-32% of GDP, otherwise the country would be in danger of potentially destabilizing

widening in current account deficits. This is only slightly ahead of global saving rate of ~25%-

26%, considering India’s state of core infrastructure and standard of living are low and both

numbers should be at least 35% and preferably closer to high 30s or low 40s.

As can be seen below, Malaysia and Thailand used to invest in mid-to-high 30s or even 40s

when they were broadly at the same stage of evolution as India (i.e. 1980s-90s). While,

clearly China is currently significantly over-investing, in 1990s-early 2000s it also maintained

a far higher level of investment than India does today. India continues to resemble countries

and regions like Brazil and Latin America generally, Turkey, South Africa, the Philippines and

the Middle East, which had persistently under-invested and over-consumed.

Fig 14 India – National Saving & Investment Rate Fig 15 EM – Investment (% of GDP) – 1980-2017

Source: IMF; Macquarie Research, May 2017 Source: IMF; Macquarie Research, May 2017

While we have been consistently emphasizing that the global economy no longer needs the

same level of gross fixed capital investment (as most new activities and emerging industries

are not capital-intensive, and productivity is no longer driven by combining capital and labour,

but rather it is now far more related to broadly defined social capital), countries like India are

an exception. The same applies to extensive areas of Africa, Middle East, South Asia or the

Philippines. We do not believe that China’s current excessive investment does anything for

productivity (indeed, on the contrary it causes long-term productivity contraction), but in India,

higher investment is not just needed, it actually yields significant returns.

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Russia

Taiw

an

Chin

a

Ko

rea

Phili

pp

ines

Bra

zil

Thaila

nd

Ind

ia

Ind

onesia

Mexic

o

Po

land

So

uth

Afr

ica

Turk

ey

Cze

ch

Hung

ary

Mala

ysia

Most impacted negatively

Least impacted negatively

RU

KO

PH

CH

TH

BR

TW

INID

MX

PO

CZHU

MY

SAF

TK

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

- 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Ranking (weighted)

Z s

co

re

Risky>>>>>

Ris

ky>

>>

>

0

5

10

15

20

25

30

35

40

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

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2006

2008

2010

2012

2014

2016

National Saving Investment

0

5

10

15

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25

30

35

40

45

50

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

India China Malaysia

Thailand Indonesia

But, India continues

to under invest and

over consume as…

…saving and

investment rates are

depressed by state

policies and

inefficiencies


12 May 2017 6

The key problem that undercuts both size and efficiency of the investment is that

India’s private sector investment is consistently lagging. According to Central Statistical

Office, private non-residential sector investment to GDP is around 13% of GDP (or broadly in

line with the US for example, but considerably below other key EMs, where private non-

residential investment is usually 20%+ of GDP).

In our view, this is driven by several interlocking factors. First, as discussed below,

complexities of securing licenses, permits, accessing land or employing people are so

overwhelming in India that it is placing a massive stumbling block on any new development.

Second, the corporate sector remains burdened with a crushing debt burden (the second-

highest leverage level in Asia ex Japan, with only Chinese SOE’s having a higher debt

burden). In 2017, average corporate had interest cover ratio of only 2.9x and dedicated

around 35% of gross profits to servicing interest commitments. This particularly applies to

some of the largest borrowers, where debt to EBITDA frequently averages around 9x-10x (the

recent Kingfisher example is just the tip of the Iceberg). Third, the high level of investment in

2008-2013 has not yet been fully absorbed, and hence capacity utilization rates remain low.

To put it simply, profitability is too low and debt levels are too high to justify incremental

investment, despite the fact that over time higher investment would generate higher profits

and help erode debt. It is a catch 22. What is clearly needed is much more robust clearing of

regulatory and bureaucratic ‘cobwebs’. As it stands today, India’s corporate sector continues

to be dominated by sub-scale, provincially based small and medium size enterprises that

have a very low level of efficiency, while a significant portion of larger enterprises suffer from

massive over-leveraging. Elimination of business restrictions and creation of a true nation-

wide economy while allowing for more efficient clearance of debts and insolvencies would

increase scale and profitability, in turn fuelling investment and further efficiency gains.

Fig 16 India – Gross Capital Formation by Sectors

Fig 17 India - Corporate Sector – Interest Expense as % of Sales and Gross Profit (%)


Fig 18 India – Corporate sector – Profit Margins and Interest Cover Ratio (%) (x)

Fig 19 India - Corporate Sector – Capacity Utilization – RBI Survey (%)


13.2% 13.6% 13.1% 13.0% 12.9%

7.5% 7.2% 7.1% 6.8% 7.5%

15.9% 14.7%12.6% 12.7% 10.8%

36.7% 35.5%32.8%

32.5% 31.3%29.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Pvt sector Public sector HH sector GCF % of GDP (total)

10

15

20

25

30

35

40

1.0

1.5

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4.0

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Interest exp to Sales Interest exp to Gross Profits (rhs)

0.0

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t-0

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-08

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8

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p-1

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14

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-15

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GP Margin PAT Margin Interest Coverage Ratio, rhs

64.0

66.0

68.0

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74.0

76.0

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-08

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r-0

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-15

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15

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c-1

5

RBI: Capacity Utilisation (OBICUS) survey

At the same time

larger corporates

suffer from over

leveraging and over

capacity while…


12 May 2017 7

Fig 20 Manufacturing Sector – by size – 2009-2012 – India dominated by very small enterprises

Fig 21 Value Added per Worker (US$000) - …which add very little in value-added

Source: MGI; Macquarie Research, May 2017 Source: MGI; Macquarie Research, May 2017

The above-described inability and/or lack of willingness by the private sector to expand and

invest is both compounded and partly explained by the state of India’s banking sector.

We agree with the recent RBI warning that risks to Indian banks are currently increasing.

Suresh Ganapathy (our India Banking analyst) estimates that as at Mar’17, stressed

assets at PSU Banks could have reached as much as 14%-15% of assets. RBI estimates for

more narrowly defined NPL’s of PSU banks tend to confirm that ratios are clearly into double-

digits. As Suresh highlights (here), a significant proportion of credit risk is now concentrated in

a number of very large Indian corporates (top 14 corporates account for almost one-third of

credit vs. 15% share a decade ago).

It is like a deadly embrace between weakened and overleveraged large corporates and

under-capitalized banks (principally state and public banks which account for around 70%

of industry’s assets). Lack of credit growth is a function of inability of larger enterprises to

maintain borrowing spree and the inability of banks to offer finance. This is compounded by

inefficiencies of India’s debt resolution system (despite recent passage of bankruptcy

legislation). On the other hand smaller enterprises (bulk of the industry) remain under-

capitalized and hence, under-invest.

Fig 22 India – Banking Sector NPL (%) – rising rapidly, with overall stressed assets closer to 15%

Fig 23 India – Credit Growth – remains exceptionally low but growing outside banking channels


0%

10%

20%

30%

40%

50%

60%

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80%

90%

100%

India Phil Indonesia Thailand China

1-49 Employees 50-199 Employees 200+ Employees

0

5

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30

35

India Phil Indonesia Thailand China

Below 50 Employyes Above 200 Employees

0.0

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2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

SCB - NPL ratio Public Sector Banks - NPL ratio

Pvt Sector Banks - NPL ratio Foreign Banks - NPL ratio

3.0%

8.0%

13.0%

18.0%

23.0%

28.0%

Ja

n-1

1

May

-11

Sep

-11

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n-1

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y-1

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n-1

7

Domestic Credit growth y/y Commercial Banks credit growth

…banking sector

continues to be

constrained, with

high level of

stressed assets


12 May 2017 8

Fig 24 India – Deposit vs. Credit Growth (%) Fig 25 India – Credit to Deposit Ratio


The same forces that preclude resolution of debt and insolvency issues also preclude

a more robust growth in broad manufacturing indices.

As discussed in our prior notes (here), the greatest challenge facing India is the need to

generate more than 10m jobs per annum. In an economy where around 60% are employed in

low productivity agriculture, the most obvious route is to develop a broader manufacturing

footprint, as services, would never accommodate such a strong job origination. The

alternative would be turning India’s demographic dividend into demographic curse, and

hence, most of the economists’ charts that show a growing labour force and employment

driving GDP growth rates would turn out badly (deadly) wrong. Instead, India would be

buffeted by even stronger winds of social dislocation and instead of accelerating, it would

recede back to traditional (Hindi) growth rates of ~3%-4% per annum (at most) rather than

7%+ that is currently envisaged by the Government and all forecasters.

Hence, the need for ‘make in India’ campaign. Although, a similar headline can be now found

in almost every country (‘Make America Great’ etc), it is actually an imperative for India.

However, we view it as largely an empty vessel. If India wanted to be the major global

manufacturer, it should have joined the globalization train that was waiting at the station in

late 1980s/early 1990’s. Countries like China, Thailand, Malaysia, Korea and Taiwan decided

to get on. But other countries decided to ‘stay on the platform’ and instead supply

commodities (e.g. Brazil) while India was lost in various ideological and bureaucratic fights,

and hence did not board that train. We believe that now, it is too late. Just as retail trade

and financial industries have been disintermediated by technology, now is the turn of

manufacturing, and as discussed in our prior reviews, we believe that over the next decade

most of the global supply and value chains will atrophy, and increasingly, it will not matter

whether cost of labour is $1 or $10/hour.

Nevertheless, if India wants to try to capture a higher share of manufacturing, it would need to

retreat from global trade and shelter some of these industries and more importantly, it would

need to implement far more robust changes to the country’s business and labour

environment. As highlighted in our prior reviews, apart from generic pharmaceuticals,

petrochemicals as well as specialty automotive sectors, India does not exhibit any

meaningful global competitiveness in any other key manufacturing categories.

In the meantime, manufacturing is supplying only ~16% of GDP (vs around 30% for China

and closer to 20%-25% for countries like Thailand, Malaysia, Indonesia and the Philippines

and an average for developed markets of ~10%-15%) and this ratio has been relatively stable

for more than three decades. Amongst EMs it is closer to where some of the resource-rich

economies are positioned (such as Brazil, South Africa or Russia). In terms of high frequency

manufacturing data, we also do not see much to suggest, that there is any sustained shorter-

term acceleration in either industrial output or specific parts (like capital goods). After a fall in

late 2016, there has been a mild recovery, but one would not describe it as much more than

that.

We maintain our view that India needs to find alternative ways of creating and

sustaining employment and growth than manufacturing.

0.0%

5.0%

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Ap

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Deposit Growth Credit Growth

45.0

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Credit to Deposit Ratio

It is too late for

manufacturing as

productivity driver

as….

…this trade left

station in 1990s and

disintermediation is

becoming more

pronounced


12 May 2017 9

Fig 26 Asia ex – Manufacturing to GDP (%) Fig 27 Resource Rich EMs – Manufacturing to GDP (%)

Source: World Bank; Macquarie Research, May 2017 Source: World Bank; Macquarie Research, May 2017

Fig 28 India – Industrial Production (% YoY) Fig 29 India – Manufacturing Output (% YoY)


…there are also massive opportunities

There are several prospective areas that can deliver far more value, including:

1. Farming productivity in India remains exceptionally low. According to McKinsey,

India’s average farming yield is only 2.5 tonnes per hectare vs. levels closer to 5 tons

in Malaysia and even higher in China and the EM average of around 4 tons per

hectare. There a number of obvious measures (with the Government already

introducing some), such as wider use of fertilizers, improved water management as

well as better infrastructure, leading to improved market access and lower spoilage.

2. Tourism as potentially significant higher value industry. India currently attracts

only around 9m arrivals per annum. This compares to 33m that visit Thailand, and

28m that come to China and almost 12m visitors to Indonesia. Indeed, even a tiny

Cambodia attracts almost 6m arrivals. Tourism generates currently around US$23bn

of service exports compared to US$30bn for Australia, more than US$45bn for

Thailand and over US$100bn for China. In other words, this has a far higher potential

than ICT industry to generate both exports and employment.

As can be seen below, India’s visitor arrivals and export revenues have been nicely

increasing, but to go much beyond current levels would require significant effort.

According to the WEF review of travel and tourism, even though India is rated as top

10 destinations in the world from the perspective of cultural heritage and in top 25 on

natural resources, the country’s rating on ‘safety and security’ is 114 (out of 136) and

its rating on health and hygiene is 104. Similarly on environmental sustainability, the

country is one of the lowest in the world (134). It also scores poorly in tourism

infrastructure and ICT. These are typical infrastructure-driven bottlenecks that can be

removed. It is a matter of getting plumbing right and ensuring better safety, with

perhaps greater promotional support.

0.0

5.0

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45.0

1980

1982

1984

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2000

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2014

India China Thailand

Indonesia Philippines

0.0

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1982

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South Africa Russia Brazil

-10.0%

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Jun

-06

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g-0

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IP y/y (overall) IP, 3MMA

-10.0%

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15.0%

Jun

-06

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IP y/y (mfr) IP (Mfr), 3MMA

There are however

alternatives,

including…

…massively raising

rural productivity

and expanding

tourism industry

while…


12 May 2017 10

Fig 30 India – International Tourism Growth (%)

Fig 31 Global Tourism Competitiveness – Key Categories (Rank/out of 136) - 2017

Source: CEIC; Macquarie Research, May 2017 Source: WEF; Macquarie Research, May 2017

3. Increasing value attribution to the conventional ICT industries. Over the last

fifteen years, this was India’s greatest success story. Whether consultancy, voice

BPO or various other forms of IT and technology outsourcing, India currently

generates exports of more than US$77bn and derives surplus of around US$75bn,

making it the world’s largest export of telecommunications, computer and information

services category. In addition, other business services account for a further

US$32bn. In other words, various forms ICT and business service exports from India

account for almost US$110bn. This makes it the third-largest global exporter, behind

the US and the UK.

However, this is also a segment that is undergoing profound changes. It is on the

sharp edge of automation and AI, while it is also under attack from an increasing

number of global destinations (from the Philippines and China to Korea and Poland).

Hence, India has failed to register any meaningful growth over the last twelve

months. Indeed, the overall, net service exports seem to have become far less linear.

Twelve months rolling net exports are down and the growth rates of service exports

have also significantly de-accelerated over the last three-to-four years.

Fig 32 India – Telecom, Computer & Software Service Exports growth (% YoY)

Fig 33 India – Total Service Net Exports (12 months sum) (US$ m)


We maintain that what is needed is to continue moving up the value chain, and away

from rapidly commoditizing segments. However, given India’s existing business

environment and limited innovation and technological evolution, it is hard. As can be

seen below, India continues to invest very little into R&D, and its share of research

publications, scientists and registered patents remains low.

According to OECD, India’s share of Triadic Families of Patents is barely 0.8% (up

from 0.3% in 2005). This compares with China’s share of around 4.7% (up from 0.9%

in 2005). Similarly, India’s R&D spending continues to languish below 1% of GDP vs.

2.1% for China, 4.2% for Korea and 3.1% in the case of Taiwan. Even Malaysia

devotes a higher share of its economy to R&D.

-15.0%

-10.0%

-5.0%

0.0%

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10.0%

15.0%

20.0%

25.0%

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35.0%

Jan

-12

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-17

Tourism Revenue: USD

2017 India China Mal Thai Indo Viet Phil

Business Environment 89 92 17 45 60 68 82

Safety & Security 114 95 41 118 91 57 126

Health & Hygiene 104 67 77 90 108 82 92

Human Resources & Labour Market 87 25 22 40 64 37 50

ICT Readiness 112 64 39 58 91 80 86

Prioratization of Tourism 104 50 55 34 12 101 53

International Openness 55 72 35 52 17 73 60

Price Competitiveness 10 38 3 18 5 35 22

Environmental Sustainability 134 132 123 122 131 129 118

Air Transport 32 24 21 20 36 61 65

Ground & Port Infrastructure 29 44 34 72 69 71 107

Tourism Infrastructure 110 92 46 16 96 113 87

Natural Resources 24 5 28 7 14 34 37

Cultural Resources 9 1 34 37 23 30 60

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Jun

-10

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BOP: Telecom/Software sector rcts (Gross), y/y

0

10,000

20,000

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r-16

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Net exports Services (12m sum), USD mn

…increasing value

in ICT chain and…


12 May 2017 11

Fig 34 R&D Spending (% of GDP) Fig 35 Global Share of Triadic Patent Families (%)

Source: OECD; Macquarie Research, May 2017 Source: OECD; Macquarie Research, May 2017

4. Improved efficiency in distribution of public spending. While not glamorous, it

will lead to significant economic and distributional gains. The Government as well as

McKinsey estimate that around 50% of public spending on basic services never

reaches intended beneficiaries. Estimates of losses in inefficiencies and leakages

vary from as much as 60%-65% in the case of health, water and sanitation to as low

as 35% in the case of food.

Whether it is education and human capital to improvement in agricultural yields and better

delivery of public services, productivity and growth opportunities are potentially massive.

India – one of the few major economies with productivity gains

As discussed in our prior notes, the global economy is essentially ex productivity growth. The

decline in Total Factor (TFP) productivity growth rates started in developed countries, in the

late 1970s, gradually spreading through DM universe in 1980s-90s. The same pattern

emerged across emerging markets over the last decade or so. While TFP estimates do pick

up some cyclical element, the slowdown is largely a secular issue, and in many ways

predates GFC, sometimes by several decades. Slower productivity gains inevitably led to

increasing income and wealth inequalities and stagnating income levels. As discussed in our

prior notes, we believe that technology and an accelerating impact of the ‘Third Industrial

Revolution’ (which commenced in early 1970s and if history is any guide would climax in

2020s) was the primary culprit, but the consequences of labour market displacement were

aggravated by societal response of trying to bring future consumption forward through over-

leveraging and over-financialization.

We believe that it is highly unlikely that productivity would improve for years to come, and if

the Governments attempt to raise output and growth through excessive investment (whether

it is infrastructure or social spending), then any rise in crude measures of labour productivity

rates would be simply offset by an even steeper fall in Total Factor Productivity (as indeed

what is currently occurring in China).

However, declining productivity is not the story of the least developed countries in places like

South Asia, parts of ASEAN and Africa. It is a pity that these economies only account for

around 10%-15% of global demand, but there are real opportunities to drive productivity

growth rates in these regions/countries through fairly conventional investment and regulation

policies. India and the Philippines are the classic examples of such economies in the Asia ex

Japan region.

Indeed, as can be seen below, whether one discounts for either official or adjusted ICT price

deflators, India and the Philippines are two of the key economies, where TFP growth rates

remain relatively strong, and indeed accelerating. Depending on the series used, India’s TFP

growth rates over the last decade were between 100-130bbps per annum and indeed faster

in the last three years. On the other hand, China’s TFP growth rates are hugging zero (and

quite likely negative). The same applies to EMs like South Africa, Turkey, Brazil, Mexico and

Malaysia and productivity gains are eroding quite rapidly in places like Korea and Taiwan.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Kore

a

Japan

Taiw

an

Ge

rma

ny

US

Fra

nc

e

Sin

g

Austr

alia

Ch

ina

Cana

da

UK

Italy

Spa

in

Ma

lay

sia

Rus

sia

Bra

zil

Turk

ey

India

HK

G

SA

Me

xic

o

Thaila

nd

Phili

ppin

es

Ind

on

2000 2015

1996 2005 2010 2014

Japan 27.1% 29.2% 35.2% 31.2%

US 33.0% 28.6% 24.5% 27.2%

Germany 14.1% 11.8% 9.7% 8.2%

Korea 0.8% 4.5% 4.7% 4.9%

China 0.1% 0.9% 2.7% 4.7%

France 5.5% 5.0% 4.7% 4.6%

UK 4.3% 3.6% 3.2% 3.3%

Switzerland 2.1% 1.8% 2.0% 2.2%

Netherlands 2.1% 2.9% 1.6% 2.1%

Italy 1.8% 1.6% 1.3% 1.4%

Sweden 2.3% 1.6% 1.2% 1.2%

Canada 1.1% 1.2% 1.1% 0.9%

Israel 0.5% 0.8% 0.7% 0.8%

Belgium 0.9% 0.9% 0.9% 0.8%

Austria 0.5% 0.7% 0.7% 0.8%

India 0.0% 0.3% 0.7% 0.8%

…significantly

improving efficiency

in distribution of

public sector

spending

India remains one of

the few major

economies to be

generating TFP

growth rates

which…


12 May 2017 12

Fig 36 TFP Growth Rates (official deflators) Fig 37 TFP Growth Rates (adjusted ICT deflators)

Source: TED; Macquarie Research, May 2017 Source: TED; Macquarie Research, May 2017

Faster productivity gains essentially allow economies to sustainably grow faster than

otherwise would be possible without igniting excessive inflationary pressures. One of the key

concerns regarding India has always been the stagflationary nature of its economy. In other

words, an upturn in activity always tended to generate higher inflation than real GDP growth

rates. If India maintains its current productivity clip, the degree to which its economy

regularly suffers from stagflationary episodes would continue to diminish.

How fast is Indian currently growing? As discussed on numerous occasions in the past, it

continues to be hard to reconcile trends of higher frequency economic trends with reported

real GDP growth rates, and we maintain that as the new national accounting systems settle

in, we at some stage are likely to see some retrospective revisions that would bring real GDP

numbers closer to high frequency numbers, implying that India is probably not growing at a

7%-7.5% clip. Some of the adjustments would probably occur in how deflators are computed

and others would adjust samples and questions. Nevertheless, it is important to highlight that

in nominal terms, the break between old and new numbers is nowhere near as aggressive

and it shows that Indian economy (in nominal terms) is slowing towards the10% range, and

over time would probably continue to ease back. However, it would still leave India as one of

the few large economies that is able to consistently deliver close to double-digit nominal

expansion (compare this with China’s struggle to keep its nominal GDP in high single digits).

It might go even better than that, if indeed structural reforms and investment were to become

reality in any meaningful way.

Fig 38 India – Real GDP Growth Rates – Old & New Fig 39 India – Nominal GDP Growth Rates – Old & New


1995-2005 2006-2015 2013-2015

South Africa 0.64 -0.47 -1.68

China 1.10 0.88 -0.42

India 0.69 1.34 1.88

Indonesia 0.75 1.22 1.18

Malaysia 0.33 0.30 -0.03

Philippines 0.56 1.79 2.32

South Korea 2.31 1.41 0.25

Taiwan 0.98 1.54 0.56

Thailand 0.96 0.91 1.03

Turkey 0.84 -0.66 -0.10

Brazil 0.28 0.10 -2.26

Mexico -0.66 -0.82 -0.64

United States 0.47 0.02 0.07

France 0.68 -0.20 0.04

Germany 0.52 0.20 0.15

Italy -0.09 -0.60 -0.03

Spain -0.66 -0.46 0.01

United Kingdom 0.53 -0.12 0.35

1995-2005 2006-2015 2013-2015

South Africa 0.50 -0.67 -1.87

China 1.28 1.22 -0.35

India 0.47 0.89 1.46

Indonesia 0.74 1.07 1.05

Malaysia 1.96 0.57 -0.13

Philippines 1.62 1.78 2.25

South Korea 2.24 1.41 0.57

Taiwan 1.74 1.61 0.33

Thailand 0.92 0.75 0.87

Turkey 0.80 -0.83 -0.26

Brazil 0.29 0.02 -2.33

Mexico -0.72 -0.93 -0.74

United States 0.46 -0.14 -0.12

France 0.45 -0.36 -0.11

Germany 0.38 0.08 0.02

Italy -0.36 -0.80 -0.21

Spain -0.90 -0.65 -0.20

United Kingdom 0.24 -0.28 0.16

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Mar

-10

Jun

-10

Sep

-10

De

c-1

0M

ar-1

1Ju

n-1

1Se

p-1

1D

ec-

11

Mar

-12

Jun

-12

Sep

-12

De

c-1

2M

ar-1

3Ju

n-1

3Se

p-1

3D

ec-

13

Mar

-14

Jun

-14

Sep

-14

De

c-1

4M

ar-1

5Ju

n-1

5Se

p-1

5D

ec-

15

Mar

-16

Jun

-16

Sep

-16

De

c-1

6

Real GDP growth (Factor Cost, 2004-05p)

Real GDP growth (y/y), 2011-2012 series

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Jun

-05

Jan

-06

Au

g-0

6

Mar

-07

Oct

-07

May

-08

De

c-0

8

Jul-

09

Feb

-10

Sep

-10

Ap

r-1

1

No

v-1

1

Jun

-12

Jan

-13

Au

g-1

3

Mar

-14

Oct

-14

May

-15

De

c-1

5

Jul-

16

Nominal GDP growth (Market prices, 2004-05p)Nominal GDP growth (y/y), 2011-2012 series

…stagflationary

tendencies

While it is hard to

believe new real

GDP growth

numbers, but

nominal growth

remains around 10%

clip


12 May 2017 13

Structural reforms & their discontents As discussed above, countries like India are unique in this world by still maintaining capacity

to maintain (and indeed accelerate) productivity gains. Whenever we think of India or the

Philippines, we imagine these countries as small pools of water that are left after a rainstorm

in the Sahara desert (or more likely Sahel). While scorching sun quickly turns most small

lakes back to desert, there are few remaining pools of water left that will eventually also dry

up, but right now they are a magnet for animals to gather and enjoy some of the few

remaining drops. However, as anyone who visited deserts knows; time is short.

Although we have never been bullish on either depth or pace of the Modi Government reform

agenda, and we always highlighted challenges that the Government is likely to face, we have

been similarly ambivalent on either strength of commitment or pace of likely reforms in other

EMs. The reason for such scepticism is simple. Structural reforms are genuinely hard,

irrespective whether countries in question are democracies or not.

At this point it is important to remind our readers of distinction that we usually draw between

tactical and secular or structural reforms. Most governments are capable of moderate tactical

reforms (such as reducing or temporarily suspending fuel subsidies when oil prices collapse

or giving greater than average room for manoeuvre to national Central Banks, after but

seldom before an emergency). While useful, tactical reforms do not address of what really ails

economies and societies. Structural or secular reforms attempt to address three areas where

corruption, patronage, nepotism and nationalism tend to reside, namely: (a) labour markets;

(b) land and its utilization; and (c) natural resources and their exploitation.

How well has Modi Government done thus far? When compared with hyper expectations that

prevailed in 2014/15, the answer would be disappointing. However, our expectations were

always much more modest, and by this standard, India had progressed much further than

other key EM contenders (circa ‘14/15), such as China (post elevation of Xi), Indonesia (post

election of Joko Widodo), Mexico (post election of Peňa Nieto) or the ‘poster child of reforms’

over the last five years, the Philippines. We had not expected anything much from Thailand or

Malaysia, and indeed not much has been delivered, while countries like South Africa and

Turkey have clearly regressed. Although it always feels mildly disheartening to assess

anyone’s performance against a largely mediocre competitive field, nevertheless, we do

reside in a relative world, and by this benchmark, Modi Government had progressed much

further than most.

Amid plethora of news and announcement (some valuable and others largely noise), we tend

to focus on five key reforms:

1. First, the Government finally passed last year India’s first-ever bankruptcy code. Why

is this important? According to the World Bank, it takes an average insolvency case

almost 4.5 years to go through the legal system (vs OECD average of less than 1.5

years) and the recovery rate is a pathetic 26% (vs. OECD average of 73%). An

associated issue of enforcing contracts takes around four years in India. While the

bankruptcy law is not yet working the way it was intended, and as usual, there is

considerable litigation regarding various aspects of the law (i.e. how one progresses

from receivership to liquidation, natural rights of bond holders, lenders etc), at least

the major step has been taken to standardize and, over time, expedite clearance of

bad debts and removing blockages in India’s credit markets.

2. Second, the country has also passed its first-ever national GST legislation. Again,

while complex negotiations have unnecessarily complicated the law (including

multiple rather than single brackets) and it remains to be seen how it will be

introduced, nevertheless, India for the first time since the nation was created in 1947

will have a chance to develop a national market from what essentially are 30

fragments. It also should improve tax audit visibility and broaden the tax net by

bringing larger part of the economy out of the shadows.

3. Third, introduction of national ID, whereby every citizen now has a number that can

be linked to tax numbers, cell phones and bank accounts, thus facilitating social

security and other support payments, reducing wastage and leakages out of the

system, while broadening state revenue bases. It should also facilitate proliferation of

banking and related electronic products.

Ability to improve

further depends on

outcome of

structural reforms

While Modi

Government is

falling short of

hyper expectations,

the pace of reforms

in India is deeper

and faster than

other EMs

Five key steps:

passing bankruptcy

law…

…planned

introduction of

GST…

…proliferation of

National ID

scheme…


12 May 2017 14

4. Fourth, the Government is aggressively using technology to effectively bypass a

blocking local and national bureaucracy. In conjunction with national ID card, most

transactions can be now completed on line and almost everything requires an ID

number. This significantly simplifies dealings with the state, while also eroding rent-

seeking behaviour.

5. Fifth, the Government has significantly eased a number of key FDI approval criteria

as well as foreign ownership caps. For example, insurance companies can be now

49% foreign owned (vs. 26% previously) while railway infrastructure as well as

scheduled and non-scheduled aviation services and cable networks can be owned

by foreign interests outright. Also, an increasing number of approvals are now

automatic, rather requiring a Government route.

While encouraging, it should be remembered that India is the only country (other than the US)

where the judicial system is making policy decisions and actively arbitrates commercial and

other disputes. This allows members of Parliament (or Congress in the US) to prepare badly

prepared legislation and engage in active horse trading to secure votes, in the knowledge that

the judicial system will arbitrate disputes in any case, thus allowing politicians to claim that

negative outcomes are not their fault, but rather a ‘solemn judicial judgement’. Hence, the

process is complex and as the above summary suggests, it is particularly difficult in the area

of labour markets (hence not much has occurred there thus far).

In order to indicate how far India needs to travel to get anywhere near some of the more

advanced emerging market economies, it should be remembered that on most indicators,

India is currently judged to be right on the bottom of the class. In the World Bank, Ease of

Doing Business, India is currently placed number 130, considerably below all other Asia

Pacific economies, and even below EM countries like Egypt or Ukraine. Only fellow South

Asian countries (such as Bangladesh) score below India.

Fig 40 World Bank Ease of Doing Business Ranking (key Categories) - 2017

Source: World Bank; Macquarie Research, May 2017

Country

Ease of

Doing

Business

Rank

Starting a

Business

Dealing with

Construction

Permits

Getting

Electricity

Registering

Property

Getting

Credit

Protecting

Minority

Investors

Paying

Taxes

Trading

across

Borders

Enforcing

Contracts

Resolving

Insolvency

Singapore 2 6 10 10 19 20 1 8 41 2 29

HK 4 3 5 3 61 20 3 3 42 21 28

Korea 5 11 31 1 39 44 13 23 32 1 4

UK 7 16 17 17 47 20 6 10 28 31 13

US 8 51 39 36 36 2 41 36 35 20 5

Taiwan 11 19 3 2 17 62 22 30 68 14 22

Australia 15 7 2 41 45 5 63 25 91 3 21

Germany 17 114 12 5 79 32 53 48 38 17 3

Malaysia 23 112 13 8 40 20 3 61 60 42 46

Netherlands 28 22 87 45 29 82 70 20 1 71 11

France 29 27 20 25 100 82 32 63 1 18 24

Spain 32 85 113 78 50 62 32 37 1 29 18

Japan 34 89 60 15 49 82 53 70 49 48 2

Russia 40 26 115 30 9 44 53 45 140 12 51

Thailand 46 78 42 37 68 82 27 109 56 51 23

Mexico 47 93 83 98 101 5 53 114 61 40 30

Italy 50 63 86 51 24 101 42 126 1 108 25

Greece 61 56 58 52 141 82 42 64 29 133 52

Turkey 69 79 102 58 54 82 22 128 70 33 126

South Africa 74 131 99 111 105 62 22 51 139 113 50

China 78 127 177 97 42 62 123 131 96 5 53

Ukraine 80 20 140 130 63 20 70 84 115 81 150

Vietnam 82 121 24 96 59 32 87 167 93 69 125

Indonesia 91 151 116 49 118 62 70 104 108 166 76

Saudi Arabia 94 147 15 28 32 82 63 69 158 105 169

Philippines 99 171 85 22 112 118 137 115 95 136 56

Argentina 116 157 173 91 114 82 51 178 111 50 98

Egypt 122 39 64 88 109 82 114 162 168 162 109

Brazil 123 175 172 47 128 101 32 181 149 37 67

India 130 155 185 26 138 44 13 172 143 172 136

Bangladesh 176 122 138 187 185 157 70 151 173 189 151

…aggressive use of

technology to

bypass bureaucracy

and…

…significant easing

of FDI restrictions

However,

implementation is

an issue and not

much done in labour

or land reforms

India has far to

travel, on most

scores…


12 May 2017 15

The same message comes from Heritage Foundation Index of Economic Freedom, with India

scoring right on the bottom of global comparisons. Although one can debate individual

numbers, India continues to score badly in a number of key categories, such as judicial

effectiveness, government integrity and labour market freedom, which more than offsets

relatively light tax burden, trade and monetary freedom. While we believe that Heritage

Foundation is overstating improvements in the countries like the Philippines and Thailand,

there is no doubt that India remains far closer to its South Asian neighbours, such as Pakistan

(rated 141), Bangladesh (rated 128) and Nepal (rated 121) than to Thailand, Malaysia, the

Philippines or even Indonesia.

Fig 41 Heritage Foundation – Index of Economic Freedom

Source: Heritage Foundation; Macquarie Research, May 2017

Not to belabour the point, similar challenges are present when we examine corruption

perception indices by Transparency International (TI). Although there has been a slight uptick

in scores, India remains one of the more difficult markets to do business in. The only

consolation is that there are quite a few other EMs that are clearly have even greater

perception of corruption than India (such as Vietnam, Bangladesh, Pakistan, Russia etc).

It takes time to translate policies into actions that become visible in some of the above

surveys and we are reasonably confident that India’s absolute scores are likely to improve in

the years to come. However, everything in the world is relative, and improvement by other

countries might still pin India down at the lower end of the comparatives. As discussed in our

prior notes, small variations do not usually have much of an impact on either pace of growth

or income levels but significant shift definitely do.

The good news is that India has everything to play for, as its starting position is so low

that any reasonable set of policies that are even half well executed should lift India’s

standing.

World Rank Score

Country 2013 2014 2015 2016 2017 Country 2013 2014 2015 2016 2017

HK 1 1 1 1 1 HK 89.3 90.1 89.6 88.6 89.8

Singapore 2 2 2 2 2 Singapore 88.0 89.4 89.4 87.8 88.6

Australia 3 3 4 5 5 Australia 82.6 82.0 81.4 80.3 81.0

Canada 6 6 6 6 7 Canada 79.4 80.2 79.1 78.0 78.5

Taiwan 20 17 14 14 11 Taiwan 72.7 73.9 75.1 74.7 76.5

UK 14 14 13 10 12 UK 74.8 74.9 75.8 76.4 76.4

Netherlands 17 15 17 16 15 Netherlands 73.5 74.2 73.7 74.6 75.8

US 10 12 12 11 17 US 76.0 75.5 76.2 75.4 75.1

Korea 34 31 29 27 23 Korea 70.3 71.2 71.5 71.7 74.3

Germany 19 18 16 17 26 Germany 72.8 73.4 73.8 74.4 73.8

Malaysia 56 37 31 29 27 Malaysia 66.1 69.6 70.8 71.5 73.8

Japan 24 25 20 22 40 Japan 71.8 72.4 73.3 73.1 69.6

Thailand 61 72 75 67 55 Thailand 64.1 63.3 62.4 63.9 66.2

Philippines 97 89 76 70 58 Philippines 58.2 60.1 62.2 63.1 65.6

Turkey 69 64 70 79 60 Turkey 62.9 64.9 63.2 62.1 65.2

Spain 46 49 49 43 69 Spain 68.0 67.2 67.6 68.5 63.6

Mexico 50 55 59 62 70 Mexico 67.0 66.8 66.4 65.2 63.6

France 62 70 73 75 72 France 64.1 63.5 62.5 62.3 63.3

Portugal 67 69 64 64 77 Portugal 63.1 63.5 65.3 65.1 62.6

Italy 83 86 80 86 79 Italy 60.6 60.9 61.7 61.2 62.5

South Africa 74 75 72 80 81 South Africa 61.8 62.5 62.6 61.9 62.3

Indonesia 108 100 105 99 84 Indonesia 56.9 58.5 58.1 59.4 61.9

China 136 137 139 144 111 China 51.9 52.5 52.7 52.0 57.4

Russia 139 140 143 153 114 Russia 51.1 51.9 52.1 50.6 57.1

Greece 117 119 130 138 127 Greece 55.4 55.7 54.0 53.2 55.0

Bangladesh 132 131 131 137 128 Bangladesh 52.6 54.1 53.9 53.3 55.0

Brazil 100 114 118 122 140 Brazil 57.7 56.9 56.6 56.5 52.9

India 119 120 128 123 143 India 55.2 55.7 54.6 56.2 52.6

Egypt 125 135 124 125 144 Egypt 54.8 52.9 55.2 56.0 52.6

Vietnam 140 147 148 131 147 Vietnam 51.0 50.8 51.7 54.0 52.4

Argentina 160 166 169 169 156 Argentina 46.7 44.6 44.1 43.8 50.4

…starting position

is so low, that even

poorly executed

reforms should

support productivity


12 May 2017 16

Fundamentals vs. Liquidity The hope and expectations story of India continues unabated, at least from an investment

perspective. While there are arguably several reasons to be somewhat more cautious on

India’s capacity to initiate and implement some of the key structural reforms (highlighted

above), investors currently seem to be ignoring this and continue to bid up Indian equity

valuations to new highs.

We actually don’t necessarily disagree with this assessment of investors – after all, in a world

devoid of growth, India stands out as a ‘shining light’ and of the select few countries capable

of delivering sustainable-quality earnings growth. If structural reforms kick in, then India’s

position would get even stronger.

Taking a step back, how do the fundamentals of the Indian market stack up?

Earnings continue to be cut – the worst in the region so far – but demonetisation is partly to blame

Our key concern remains that there appears to be disconnect between underlying

fundamentals of the corporate sector and economy on the one side and current market

valuations. As discussed above, a number of pillars of the Indian economy are exhibiting

signs of weariness. On top of this, corporate earnings growth expectations continue to come

off.

For example, if we look at a trend in underlying earnings (EPS) for MSCI India (as compiled

by Thomson IBES), analysts continue to reduce their earnings estimates for calendar year

2016 as well as 2017. Since Oct-2016, MSCI India’s EPS for 2016 and 2017 (calendarised for

Dec) has been cut by 4-6% – which has been the worst in the region, as highlighted by our

recent MicroStrategy review (link).

Fig 42 MSCI India Consensus EPS expectations (INR)…Earnings downgrades continue…

Fig 43 MSCI India consensus EPS growth…with consensus expecting 16-17% growth for Dec-2017

Source: MSCI, IBES, Thomson, Macquarie Research, May 2017 Source: MSCI, IBES, Thomson, Macquarie Research, May 2017

At the same time, forward earnings expectations continue to appear excessive, in our view,

with India one of the few countries in Asia ex Japan where analysts remain excessively

bullish on earnings outlook. Consensus currently expects MSCI India to deliver earnings

growth in excess of 16% for Dec-2017 (calendarised) or closer to +19% (for March -2018E,

based on our bottom-up numbers). This compares to 5-6% earnings growth that MSCI India

companies are expected to deliver for the current year (March-2017P) – this has come down

from the consensus expectations of +12-13% that prevailed in Oct-16.

Even if we exclude volatile resources sector earnings, current earnings growth

expectations for next year are closer to +21%, which again appear quite excessive to us.

Another cause of concern is revenue growth expectations, with current consensus

expecting top-line growth next year to be +11-12% (vs 5-6% for March-2017P).

50

53

55

58

60

63

65

Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17

Dec-16 Dec-17

0

3

5

8

10

13

15

18

20

Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17

12/2016 EPSg 12/2017 EPSg

The hope remains

exceptionally high

amongst investors,

despite…

…EPS lagging and

expectations

remaining elevated,

leaving…


12 May 2017 17

While recent earnings disappointments were due to the impact of demonetisation, our key

concern is that ‘normalisation’ hope seems to be already excessively built into the forecasts.

Hence, room for further earnings upgrades appears limited from current levels. At the same

time, recovery (from a ‘low base’) in earnings hinges on the earnings outlook for just few

companies like Tata Motors, Axis Bank, Vedanta and SBI (together these four companies

account for almost 10% contribution to overall Mar-2018 earnings growth of 20%). Overall,

the risk/reward from an earnings standpoint seems unfavourable on a 6-9 month view.

Given that in the short term stock prices tend to move much more closely with earnings

revisions rather than absolute level of earnings growth, the topping out of the likely earnings

expectations is not a positive sign.

Fig 44 MSCI India – Consensus Revenues and Earnings Growth Estimates (% y/y growth) - Headline vs Ex-resources Revenue and Earnings growth expectations

Source: Factset, MSCI, Macquarie Research, May 2017; Note: Bottom-up aggregated estimates using MSCI index companies; Uses constant currency terms and same universe for y/y comparisons;

Valuations are stretched - MSCI India is trading close to 18x PER

Meanwhile, markets continue to grind higher (driven by PE expansion rather than earnings

upgrades) with current forward earnings multiple for the market close to 18x level – or almost

+1stdev above the LT average of 14.6x. Since 2010, the 12-month forward PE range for

MSCI India has been 11.7x-18.3x, with current multiples close to historic highs.

Fig 45 MSCI India–12M forward Price/Book (x) Fig 46 MSCI India – 12M forward P/E (x)

Source: MSCI, IBES, Thomson, Macquarie Research, May 2017 Source: MSCI, IBES, Thomson, Macquarie Research, May 2017

6%

12%

5%

19%

5%

11%

-1%

21%

-5%

0%

5%

10%

15%

20%

25%

Mar-17P Mar-18E Mar-17P Mar-18E

RevenueG EarningsG

MSCI India India (ex resources)

0.8

1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

MSCI INDIA-12m fw PTBV

+ 1 stdev

- 1 stdev

Average

6

8

10

12

14

16

18

20

22

24

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

May

-14

May

-15

May

-16

MSCI INDIA-12m fw PER

+ 1 stdev

- 1 stdev

Average

…almost no room

for positive

surprises while

multiples are

reaching 18x


12 May 2017 18

Fig 47 Valuations – MSCI India key sectors

Note : Priced as of close of 9 May 2017 Source: MSCI, Thomson, Macquarie Research, May 2017

Investor optimism trends are driving massive liquidity flows – and these trends are likely to continue.

Whilst the above issues of stretched earnings and valuations are – and have been – a cause

of concern for us for some time, it seems investors clearly ignore them and remain optimistic.

This optimism is reflected in solid equity market inflows from both domestic as well as foreign

investors.

Whilst foreigners were net sellers of Indian equities (as well as bonds) between Oct’16 and

Jan’17 due to concerns regarding impact of demonetisation, they have returned over the last

three months. Year to date foreign net-flows into equities so far have been around US$6.3bn

(vs net equity inflows of US$3.2bn during the entire 2016).

Fig 48 Foreigners have returned into domestic Equities, with YTD net flows +US$6.3bn

Fig 49 …as well as bond markets after being heavy net-sellers during months following demonetisation

Source: SEBI, CEIC, Macquarie Research, May 2017 Source: SEBI, CEIC, Macquarie Research, May 2017

At the same time, domestic liquidity flows remain strong, driven by net-inflows into

domestic mutual funds.

As can be seen below, since election of current BJP/Modi Government (May’14), domestic

equity mutual funds have seen net-positive flows almost every month (based on SEBI data) –

thus bucking the trend for several years when domestic investors were persistent net-sellers.

In total, investors have net bought some INR1.6trn (or US$25bn) of equity mutual funds since

general elections. This averaged approximately INR47bn per month (~US$700-750mn) which

domestic fund managers needed to deploy into domestic equities. To put this US$25bn

mutual fund flows number in perspective – this is slightly more than the ~US$23bn of net

buying of Indian equities by foreigners since May’14.

More recently, Systematic Investment Schemes (SIPs) – which allow investors to invest a

certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.) – have

also been faring very well. As can be seen below, flows via SIPs have averaged more than

US$550mn/month during the fiscal year 2016-2017 (more than 10% of gross inflows into

Equity Mutual funds, on our estimates). The good thing about these flows is that unlike

traditional mutual fund flows; flows via these products can be “stickier”.

Avg since 2010

MSCI Indices PER P/B EPS gr ROE DY PER P/B ROE DY PER P/B PER P/B

MSCI India 18.0 2.7 16.5 15.2% 1.6% 14.6 2.6 16.5% 1.6% 15.4 2.4 17% 12%

India Consumer Discretionary 18.0 3.0 35.6 16.7% 1.0% 13.4 3.1 22.0% 1.6% 13.5 3.1 34% -2%

India Consumer Staples 34.1 11.4 15.8 33.3% 1.7% 23.7 7.9 31.3% 2.2% 28.8 9.4 18% 21%

India Energy 13.3 1.6 0.9 12.3% 1.9% 11.2 1.8 14.2% 1.7% 11.1 1.5 20% 11%

India Financials 18.9 2.7 26.2 14.3% 1.4% 14.2 2.4 15.2% 1.5% 15.3 2.3 23% 17%

India Health Care 19.3 3.4 21.1 17.5% 0.7% 20.5 3.9 18.0% 0.9% 21.5 3.8 -10% -11%

India Industrials 25.8 3.7 19.0 14.3% 1.0% 16.7 3.2 16.3% 1.2% 18.1 2.6 43% 41%

India Information Technology 14.4 3.1 5.0 21.7% 3.0% 17.8 4.8 25.1% 1.4% 17.1 4.2 -16% -26%

India Materials 15.9 2.1 31.7 13.4% 1.0% 10.5 1.7 14.4% 1.5% 11.9 1.4 33% 47%

India Utilities 12.8 1.4 16.3 11.2% 2.3% 12.2 1.6 11.8% 2.1% 12.7 1.4 1% 3%

India Telcos nm 2.2 -33.7 3.4% 1.4% 15.8 1.5 8.9% 0.7% 20.0 1.4 na 59%

12 Month forward estimates LT Average (12M forward ests) Current vs post-2010 avg

-4,000

-2,000

0

2,000

4,000

6,000

8,000

Jan

-09

Ap

r-0

9Ju

l-0

9O

ct-0

9Ja

n-1

0A

pr-

10

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1Ju

l-1

1O

ct-1

1Ja

n-1

2A

pr-

12

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3Ju

l-1

3O

ct-1

3Ja

n-1

4A

pr-

14

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5Ju

l-1

5O

ct-1

5Ja

n-1

6A

pr-

16

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Net FII Investment in Equities (USD mn)

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

Jan

-09

Ap

r-0

9Ju

l-0

9O

ct-0

9Ja

n-1

0A

pr-

10

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1Ju

l-1

1O

ct-1

1Ja

n-1

2A

pr-

12

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3Ju

l-1

3O

ct-1

3Ja

n-1

4A

pr-

14

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5Ju

l-1

5O

ct-1

5Ja

n-1

6A

pr-

16

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Net FII Investment in Bonds (USD mn)

Lack of alternative

opportunities and

increasing

anticorruption and

demonetization

drive is…

…driving significant

liquidity into

equities


12 May 2017 19

Fig 50 Net Flows into Domestic equity mutual funds remain strong with almost Rs1.6trn of net buying by investors since election of BJP/Modi Govt

Fig 51 Flows into Systematic Investment Schemes (SIPs) remain strong comprising more than 10% of Gross Inflows into MFs

Source: SEBI, CEIC, Macquarie Research, May 2017 Source: AMFI, Macquarie Research, May 2017

There is a great deal more room to run, as India’s household/retail allocations towards

equities remain dismally low, with preferred investment asset classes traditionally being either

gold, real estate or time deposits. However, these preferences are changing due to declining

inflation and stronger rupee (bad for INR Gold prices), crackdown on corruption, unaccounted

black money and trends towards more cashless society (bad for real estate) and lower

nominal interest rates.

Hence, it is quite possible that strong domestic inflows into equities may continue as

retail/households channelize savings pool from traditional ‘physical assets’ into

‘financial assets’ such as equities.

If these trends continue, it is likely that going forward domestic equity flows become the key

driver of stock markets – as opposed to foreign investor flows which traditionally have been

the marginal driver of stock prices and arguably a source of significant volatility for stock

indices. If the current trends persist, India’s domestic market might start behaving more like

Malaysia’s KLCI (in terms of key drivers being domestic flows vs foreign flows and lower than

average volatility).

Stocks - stay with Quality-Growth franchises….

With overall market valuations stretched, stock selection becomes critical.

From a regional perspective, we maintain our preference for Quality-Growth franchises

(i.e companies that are likely to deliver high ROEs which are ideally coming from higher

margins as opposed to top line growth rates; strong balance sheets with FCF positive trends

and low leverage; and lastly exhibiting some earnings growth).

Indeed, a number of Indian companies screen for us that meet this criteria. Our Asia Quality-

Sustainable growth model portfolio currently holds ITC, Maruti Suzuki, Eicher Motors and

Godrej Consumer Products. While investors usually complain that, these stocks are

optically expensive, our justification has always been that we are willing to pay higher

premium for quality growth stocks rather than attempting to catch various temporary ‘waves’.

It is predicated on our core Thesis, that investment landscape would remain largely non-mean

reversionary.

Meanwhile, our Head of India Research and Strategist Inderjeet Bhatia, recommends (refer

India Strategy - Political risk premium to decline, 14 March 2017) exposure to domestic

cyclical plays like Infrastructure, Financials and Housing alongside rural plays. Our India team

recommends Hero Motocorp, L&T, HDFC Bank and ITC as top picks in the large cap

space. To play the rural recovery thematic, our Head of Research recommends Hero

Motocorp, Marico, and Asian Paints.

-110,000-90,000-70,000-50,000-30,000-10,00010,00030,00050,00070,00090,000

110,000130,000

Jan-

09

May

-09

Sep-

09

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

Sep-

11

Jan-

12

May

-12

Sep-

12

Jan-

13

May

-13

Sep-

13

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

Domestic Mutual Funds (Equity) : Net Purchase/Sales (INR mn)

BJP/Modi Govt

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Apr

-16

May

-16

Jun-

16

Jul-1

6

Aug

-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan-

17

Feb-

17

Mar

-17

SIP flows (Rs bn)

Foreigners are

joining but locals

are in the lead

Regionally, we

continue to

recommend Quality

& Sustainable

growth names

Our India office

prefers

infrastructure,

financials, housing

and rural plays


12 May 2017 20

Appendices

Fig 52 Index performance, (Local currency, unless stated otherwise), %


Fig 53 Index performance by MSCI countries and sectors (local currency) – Last three months, %


MSCI Indices - 1W - 1M - 3M - 1Y - 3Y - 5Y YTD Index

MSCI AC Asia ex JP (LC) 1.1 3.2 7.6 22.9 16.0 27.4 14.3 738

ASXJ Consumer Discretionary 1.1 4.4 10.8 21.2 -8.8 -1.5 16.0 487

ASXJ Consumer Staples 1.7 3.1 4.4 1.0 9.4 21.3 6.7 502

ASXJ Energy -1.7 -4.0 3.4 20.5 -9.0 -19.0 7.0 613

ASXJ Financials 0.8 3.1 5.9 24.5 19.7 32.1 12.4 331

ASXJ Health Care 1.5 0.8 0.4 -1.1 24.8 78.1 3.5 900

ASXJ Industrials 0.7 1.2 6.3 12.3 -1.9 3.0 12.3 165

ASXJ Information Technology 2.2 7.7 13.5 43.9 44.7 80.4 21.9 445

ASXJ Materials -1.3 -2.2 -0.9 18.7 10.8 2.7 6.1 342

ASXJ Utilities 1.1 0.2 4.5 3.6 5.2 32.2 9.6 230

ASXJ Telecom Svcs 1.0 -0.9 0.2 1.1 3.0 7.3 5.9 137

MSCI AC ASIA EX JP U$ 0.8 3.3 8.6 24.4 9.9 20.6 17.4 604

MSCI CHINA U$ 0.6 2.6 7.1 27.5 19.9 20.1 17.1 69

MSCI HONG KONG U$ 0.5 2.4 8.8 20.0 17.4 39.6 17.2 10,950

MSCI INDIA U$ -1.0 -0.3 8.9 17.5 19.1 43.3 18.3 528

MSCI INDONESIA U$ 0.5 2.0 7.4 19.9 1.1 -4.9 10.5 829

MSCI KOREA U$ 3.5 8.5 13.9 31.2 7.6 19.2 24.0 472

MSCI MALAYSIA (EM) U$ -1.1 3.6 7.0 -0.5 -30.7 -24.0 11.4 354

MSCI PHILIPPINES U$ 3.1 5.2 9.2 6.6 2.4 35.9 15.6 567

MSCI SINGAPORE U$ 0.4 2.3 5.9 12.7 -13.7 -4.1 15.1 3,649

MSCI TAIWAN U$ -0.0 3.5 7.9 35.2 17.0 36.0 15.5 352

MSCI THAILAND U$ -0.5 -1.3 1.5 15.0 4.1 1.0 6.7 387

MSCI China 0.6 2.7 7.4 27.8 20.3 20.3 17.5 69

MSCI Hong Kong 0.5 2.6 9.2 20.3 17.9 40.0 17.6 15,345

MSCI India -0.3 0.4 5.2 14.2 28.4 72.5 12.7 1,108

MSCI Indonesia 0.7 2.3 7.8 20.4 17.1 37.5 9.5 6,705

MSCI Korea 3.6 8.3 12.5 27.3 18.9 18.3 16.2 674

MSCI Malaysia -0.7 1.5 4.8 7.8 -6.7 7.6 7.9 618

MSCI Philippines 3.0 4.9 9.2 13.0 17.1 59.9 16.1 1,360

MSCI Singapore 1.5 2.9 5.3 16.1 -2.8 7.7 12.4 1,672

MSCI Taiwan 0.7 2.2 5.1 26.2 17.5 40.0 8.4 373

MSCI Thailand 0.3 -0.8 0.8 13.8 11.0 13.0 3.6 539

MSCI EMG 0.8 3.0 6.0 20.4 13.5 22.2 11.4 53,106

MSCI World (Dev) 0.6 2.4 4.6 17.8 22.3 68.0 7.1 1,461

MSCI AC World (All) 0.7 2.4 4.8 18.1 21.4 61.9 7.6 538

MSCI Japan 1.9 5.8 3.9 19.9 31.6 101.0 3.3 943

MSCI USA 0.2 1.7 3.8 16.6 27.1 76.3 7.2 2,283

MSCI AC Asiapac x JP ($) -0.3 2.1 6.7 21.5 3.0 15.8 14.7 489

MSCI AC WORLD U$ 0.4 2.6 5.0 16.1 11.0 45.8 8.8 459

MSCI EM U$ 0.2 3.0 7.0 23.7 -1.6 1.3 14.9 991

MSCI WORLD U$ (Dev) 0.4 2.6 4.8 15.2 12.5 52.6 8.1 1,893

MSCI EM ASIA U$ 0.9 3.5 8.7 25.8 10.6 19.7 17.6 493

MSCI WORLD EX JP ($) 0.4 2.6 4.9 15.4 12.1 53.8 8.4 1,913

MSCI EUROPE U$ 1.6 6.3 9.9 13.7 -8.5 30.4 12.6 1,657

MSCI EMU U$ 1.9 7.3 13.7 18.5 -3.6 47.2 15.4 196

MSCI AC Asia ex JP

AC

Asia

ex JP

China HK India Indo Korea Mal Phils Sing TW Thai EMG World

(Dev) Japan

AC

World

MSCI Country Index 7.6 7.4 9.2 5.2 7.8 12.5 4.8 9.2 5.3 5.1 0.8 6.0 4.6 3.9 4.8

Cons. Disc 10.8 17.4 17.7 -1.4 5.9 9.7 10.5 6.3 6.6 -2.4 2.0 11.6 7.1 4.6 7.5

Staples 4.4 -7.6 15.8 4.3 5.4 12.9 0.9 12.3 -12.0 6.9 1.8 5.8 4.9 7.3 5.0

Energy 3.4 -4.0 na 12.7 3.3 16.0 2.3 0.0 0.0 -2.4 -0.1 -0.3 -4.0 3.1 -3.6

Financials 5.9 0.6 9.7 11.1 12.4 8.5 8.2 6.9 9.2 2.0 -1.6 4.0 2.3 -0.5 2.5

Banks 6.2 1.8 2.9 10.3 12.4 10.4 8.2 8.8 9.9 3.4 -1.6 4.6 2.0 -1.2 2.5

Real Estate 7.0 2.7 0.0 na 6.6 na 7.6 7.7 5.0 -0.6 7.6 3.1 2.6 2.0 2.6

Health Care 0.4 4.7 na -4.6 5.1 5.6 -0.3 na 0.0 -2.9 -2.2 -0.3 6.1 4.5 6.0

Industrials 6.3 0.7 7.7 12.9 -3.5 7.8 7.0 12.7 8.0 -1.4 -0.2 6.1 6.3 3.9 6.3

IT 13.5 13.4 26.0 1.0 na 18.6 0.0 0.0 0.0 8.3 4.4 13.3 9.5 9.5 10.1

Materials -0.9 -10.3 0.0 8.4 -2.9 -1.5 -1.2 0.0 na -4.9 2.6 -3.5 0.3 1.5 -0.3

Utilities 4.5 3.0 5.5 2.5 -13.9 11.5 -0.3 -2.2 na na 3.9 2.2 5.8 5.7 5.5

Telecom Services 0.2 -3.7 -10.1 -2.0 11.1 5.7 3.6 17.2 -4.0 5.1 5.2 1.9 -0.8 0.5 -0.3


12 May 2017 21

Fig 54 Valuations – Asia ex JP and key comps

Note : Priced as of close of 8 May 2017 Source: MSCI, Thomson, IBES, Macquarie Research, May 2017

Fig 55 MQ – Country Allocation Tilts (%)

Source: Macquarie Research, May 2017

Avg since 2010

MSCI Indices PER P/B EPS gr ROE DY PER P/B ROE DY PER P/B PER P/B

MSCI AC Asia ex JP 12.8 1.4 15.1 11.2% 2.6% 12.0 1.6 12.9% 2.9% 11.6 1.5 10% -2%

ASXJ Consumer Discretionary 14.5 1.6 17.6 11.3% 2.0% 11.2 1.8 15.4% 2.3% 11.4 1.7 28% -6%

ASXJ Consumer Staples 20.8 2.9 9.3 13.7% 2.1% 16.4 2.7 15.2% 2.4% 19.1 2.7 9% 4%

ASXJ Energy 12.2 1.1 25.5 9.0% 3.2% 10.1 1.6 14.3% 3.2% 10.6 1.3 15% -16%

ASXJ Financials 9.9 1.1 8.3 11.0% 3.3% 11.8 1.3 11.4% 3.3% 10.2 1.2 -3% -7%

ASXJ Health Care 22.7 3.2 21.1 14.1% 1.0% 18.9 3.2 15.7% 1.1% 21.7 3.3 5% -1%

ASXJ Industrials 13.7 1.2 16.0 8.5% 2.3% 13.1 1.4 10.6% 2.5% 12.7 1.3 8% -8%

ASXJ Information Technology 13.8 2.3 26.0 16.7% 1.9% 13.2 2.0 15.7% 2.2% 12.3 1.9 12% 20%

ASXJ Materials 12.3 1.2 14.7 9.6% 2.9% 10.5 1.4 12.7% 3.2% 11.9 1.3 3% -7%

ASXJ Utilities 11.9 1.2 4.4 10.3% 3.5% 12.5 1.4 10.8% 3.3% 12.9 1.4 -8% -12%

ASXJ Telecommunication Services 16.1 1.8 6.6 11.2% 3.7% 13.2 2.0 14.8% 4.0% 13.9 1.9 15% -4%

MSCI China 12.4 1.5 15.3 12.2% 2.3% 11.5 1.7 14.7% 3.0% 10.1 1.5 23% 5%

MSCI Hong Kong 15.7 1.2 8.2 7.5% 3.1% 15.4 1.4 8.6% 3.3% 14.8 1.2 6% -5%

MSCI India 18.0 2.7 16.5 15.2% 1.6% 14.6 2.6 16.5% 1.6% 15.4 2.4 17% 12%

MSCI Indonesia 15.9 2.6 16.4 16.3% 2.5% 11.6 2.8 21.4% 3.1% 14.0 2.9 14% -11%

MSCI Korea 9.1 1.0 24.6 10.9% 1.9% 9.3 1.2 12.2% 1.7% 9.3 1.1 -2% -9%

MSCI Malaysia 16.5 1.6 3.8 9.7% 3.0% 14.4 1.9 12.7% 3.5% 14.9 1.9 11% -14%

MSCI Philippines 18.5 2.3 6.0 12.4% 1.6% 15.1 2.2 14.4% 2.6% 16.9 2.5 9% -10%

MSCI Singapore 13.9 1.2 6.5 8.5% 3.8% 14.0 1.5 10.7% 3.7% 13.2 1.3 5% -12%

MSCI Taiwan 13.2 1.7 10.2 12.5% 4.2% 13.9 1.7 13.1% 3.9% 13.2 1.7 0% -1%

MSCI Thailand 14.4 1.8 7.9 12.7% 3.0% 11.1 1.8 15.9% 3.8% 12.1 1.9 18% -2%

MSCI EMG 12.1 1.5 16.8 12.1% 2.8% 10.8 1.6 14.2% 3.1% 10.8 1.4 12% 2%

MSCI World (Dev) 16.6 2.2 11.9 13.0% 2.6% 14.7 1.9 13.5% 2.7% 13.9 1.8 20% 21%

World(Dev) Consumer Discretionary 16.8 2.7 11.8 16.3% 2.0% 16.5 2.1 13.7% 2.0% 15.0 2.3 12% 21%

World(Dev) Consumer Staples 20.1 4.0 8.9 19.9% 2.8% 16.7 3.2 19.2% 2.8% 16.9 3.2 19% 24%

World(Dev) Energy 21.5 1.6 87.8 7.3% 3.7% 14.3 1.8 13.9% 2.9% 15.7 1.5 37% 5%

World(Dev) Financials 12.9 1.2 10.4 9.1% 3.1% 11.9 1.2 10.6% 3.4% 11.6 1.0 11% 12%

World(Dev) Health Care 16.4 3.4 6.2 20.5% 2.1% 15.9 3.0 19.8% 2.3% 14.5 2.9 13% 17%

World(Dev) Industrials 17.4 2.8 13.4 16.1% 2.4% 15.2 2.1 14.5% 2.4% 14.4 2.1 21% 32%

World(Dev) Information Technology 18.2 3.7 11.4 20.4% 1.5% 19.0 2.9 18.4% 1.2% 14.5 2.8 26% 32%

World(Dev) Materials 15.9 2.0 16.4 12.4% 2.6% 14.1 1.8 13.5% 2.4% 13.6 1.7 16% 17%

World(Dev) Utilities 16.4 1.6 1.4 10.0% 3.9% 14.1 1.6 10.7% 4.2% 14.6 1.4 12% 19%

World(Dev) Telecommunication Services 14.6 2.0 1.0 14.0% 4.3% 19.5 1.8 12.7% 4.5% 13.6 1.8 7% 12%

MSCI AC World (All) 16.0 2.1 12.6 12.9% 2.6% 14.3 1.9 13.6% 2.8% 13.5 1.7 19% 18%

MSCI Japan 13.8 1.2 13.9 8.8% 2.2% 16.6 1.3 8.5% 1.7% 13.7 1.1 1% 9%

MSCI USA 18.0 2.9 11.2 15.9% 2.1% 15.3 2.3 15.5% 2.1% 14.7 2.2 23% 27%

MSCI Australia 15.8 1.9 8.4 12.1% 4.5% 14.0 2.0 14.2% 4.7% 13.7 1.8 15% 8%

12 Month forward estimates LT Average (12M forward ests) Current vs post-2010 avg

-3 -2 -1 0 1 2 3

India

China

Philippines

Taiwan

Korea

Hong Kong

Singapore

Malaysia

Thailand

Indonesia


12 May 2017 22

Recent Equity Strategy Research

Who is driving reflation? - China is out; it is all up to the US 5 May 2017

Thematics Portfolio - Why Amazon and not Apple? 24 April 2017

Ready for Battle - Stocks to watch this earnings season 20 April 2017

Rights, Wrongs & Returns - 2H’17 – Clash of the Titans 11 April 2017

What caught my eye? v.74 - China – Atlas holding up the sky 24 March 2017

Money rollercoaster - Dumb money, smart money and AI 3 March 2017

What caught my eye? v.73 - Is higher uncertainty = higher growth? 2 March 2017

Asia MicroStrategy - Earnings recovery. Is it sustainable? 23 Feb 2017

‘Danse Macabre’ - Strong leaders, US$ and gold 21 Feb 2017

Bond vs. Equity markets - Little reflation in one; a lot in another 21 Feb 2017

What caught my eye? v.72 - Surfing debt wave. Don’t look down! 16 Feb 2017

Reflationary theme - Is it peaking? We think so 16 Feb 2017

What caught my eye? v.71 - Investing in a policy & twitter blizzard 8 Feb 2017

What caught my eye? v.70 - Eurozone’s Achilles’ heel 19 Jan 2017

Ready for Battle - Stocks to watch this earnings season 12 Jan 2017

What caught my eye? v.69 - Is China on the wrong side of history? 5 Jan 2017

What caught my eye? v.68 - Is it time for quality, growth or value? 20 December 2016

Fed’s dilemmas - Binary outcomes and fat tails 15 December 2016

What caught my eye? v.67 - Populism = Stagflation & Poor return 7 December 2016

Strategy for the New World - Changing Landscape & Investment Rules 6 Dec 2016

Asia MicroStrategy - The Yield curveball 24 November 2016

Rights, Wrongs & Returns - 2017– State reflation or stagflation? 15 November 2016

Dawn of a new age - Populism rules. Status quo – R.I.P. 9 November 2016

DXY & Markets - Has the link been broken? 3 November 2016

What caught my eye? v.66 - Is it reflation, stagflation or twilight? 27 October 2016

Ready for Battle - Stocks to watch this earnings season 12 Oct 2016

What caught my eye? v.65 - Is China ‘a shining city upon a hill’? 7 October 2016

MicroStrategy - Buy & sell side: Most loved & hated stocks 26 September 2016

Markets & US elections - Donald or Hillary, does it matter? 13 September 2016

What caught my eye? v.64 - Could strong DXY be good for EMs? 9 September 2016

In JFK’s footsteps - Mars, communism, fascism or war 1 September 2016

What caught my eye? v.63 - Deconstructing SPX – mind the GAAP 25 August 2016

Twilight - where to now? - ‘Damned Volcker’ and equities 16 August 2016

EM Equities ‘Goldilocks’ - It is all about US10Y & DXY 12 August 2016

What caught my eye? v.62 - Thailand & coups – any benefit? 11 August 2016

Policy cross-roads - Is it the end of monetary activism? 1 August 2016

What caught my eye? v.61 - ‘Lumpenproletariat’ & deglobalization 20 July 2016

Rights, Wrongs & Returns - 2H16 – Investment Twilight zone 15 July 2016

Investment twilight - Between ignorance & confusion 12 July 2016

Ready for Battle - Macquarie earnings survivors’ guide 6 July 2016

MicroStrategy - Beyond Brexit, back to Asian fundamentals; where to from here? 29 June

2016

Brexit et al - It is all about 2nd derivatives & CBs 24 June 2016

What caught my eye? v.60 - Parallel lives: Japan vs. China 23 June 2016

What caught my eye? v.59 - In praise of Thematics 7 June 2016

What caught my eye? v.58 - Divergence, convergence & confusion 24 May 2016

What caught my eye? v.57 - Portfolios: The case of less is more 17 May 2016

What caught my eye? v.56 - Capital – Time for a vegetarian diet? 11 May 2016

What caught my eye? v.55 - Why are we staying in China & India? 29 April 2016

Ready for Battle - Macquarie earnings survivors’ guide 21 April 2016

Rights, Wrongs & Returns - Year of Living dangerously – sequel 13 April 2016

Central Banks & Markets - Mutually assured destruction 31 March 2016

Global Travel Notes - The blind leading the blind 29 March 2016

MicroStrategy - Earnings season – A letdown so far but there is a silver lining 22 March 2016

What caught my eye? v.54 - Negative rates and the war on savers 2 March 2016


12 May 2017 23

What caught my eye? v.53 - Philippines shelter; CBs calling E.T 23 February 2016

Is it a policy dead-end? - Consistency in an inconsistent world 11 February 2016

What caught my eye? v.52 - Launching global portfolios 4 February 2016

Central Banks - Why insistence on failed policies? 1 February 2016

China’s hard landing - Has it already happened? 27 January 2016

What caught my eye? v.51 - Bulls, Bears and low rates 22 January 2016

What caught my eye? v.50 - The Fed and the need for redemption 11 January 2016

MicroStrategy – Growth it is - Five reasons we prefer Growth over Value 8 January 2016

China choices – narrowing - Between a rock and a hard place 7 January 2016

What caught my eye? v.49 - China’s savings dilemma 4 January 2016

Fed hikes. What now? - Implications for EM equities 17 December 2015

20 YEARS IN ASIA, 14 December 2015

Is it Bear Stearns moment? - Year of living dangerously, part II 14 December 2015

Rights, Wrongs & Returns - 2016 - Year of living dangerously 25 November 2015

Policy cross-currents - What would unhinge PBoC? 12 November 2015

Bihar dreaming - On impossibility of reforms 9 November 2015

What caught my eye? v.48- EMs – downside to the upside, 3 November 2015

What caught my eye? v.47- The more they do; the worse it gets, 27 October 2015

What caught my eye? v.46-Equities – irrational exuberance?, 8 October 2015

Time for a policy U-turn? - Back to the future: British Leyland, 18 September 2015

What caught my eye? v.45 - Today is more insidious than 1997, 16 September 2015

Old Friend Deflation is Back - From traders to shareholders, 25 August 2015

EM vs DM Equities - What would the average opinion say?, 20 August 2015

Deflators of the world unite - Impact on the US & Global PPIs, 17 August 2015

China’s dilemma - Between a rock and a hard place, 13 August 2015

Return of deflationary vortex - Commodities – canary in a coalmine?, 10 August 2015

What caught my eye? v.44 - Barbarians at the gate, 5 August 2015

China’s policy response - How different is it to G4 economies?, 20 July 2015

Rights, Wrongs & Returns - 2H–Falling knives & deflating bubbles, 13 July 2015

Are dominos finally falling? - Greece, Puerto Rico, China, 6 July 2015

What caught my eye? v.43 - Why consumer & business reticence?, 29 June 2015

China drama & Greek farce - Are CBs at the end of the road?, 29 June 2015

What caught my eye? v.42 - Resisting China; Asia ex earnings, 17 June 2015

Trade & Cyclicality - Stagnation in both = lower yields, 28 May 2015

What caught my eye? v.41 - China & Global Manufacturing, 27 May 2015

What caught my eye? v.40 - CBs vs deflation: will liquidity win?, 8 May 2015

What caught my eye? v.39 - China & Indonesia: Binary outcomes, 29 April 2015

What caught my eye? v.38 - When size does not matter, 13 April 2015

Rights, Wrongs & Returns - 2Q-3Q’15 - The Hall of Mirrors, 27 March 2015

Global Liquidity Watch - Return of Greenspan’s conundrum?, 10 March 2015

What caught my eye? v.37 - India hope is still intact; travel notes, 5 March 2015

Chasing dividends - No mean reversion = desire for yield, 13 Feb 2015

What caught my eye? v.36 - Secular stagnation & four horsemen, 6 Feb 2015

Global liquidity watch - Liquidity tight but should improve, 27 Jan 2015

What caught my eye? v.35 - Focus on Thailand; CBs’ effectiveness, 26 Jan 2015

What caught my eye? v.34 - Trade & Flow watch; A vs H shares, 8 Jan 2015

Is deflation almost here? - What do DXY & bonds tell us, 6 Jan 2015

Global contagion risks - Commodities: canary in a coal mine?, 17 Dec 2014

China A retail exuberance - Damned if you do and damned if you don’t, 9 Dec 2014

Global Liquidity Watch - Eroded in 3Q’14 & Oct/Nov, 8 Dec 2014

Rights, Wrongs & Returns - 2015 preview: the “known unknowns”, 2 Dec 2014

How exposed is Korea? - Yen “doomsday machine”, 17 November 2014

What caught my eye? v. 33 - Currency wars & their discontents, 13 November 2014

What caught my eye? v.32 - On social upheavals, schools & robots, 30 October 2014

What caught my eye? v.31 - Is China in a liquidity trap? EM risks, 16 October 2014

What caught my eye? v.30 - EM vulnerabilities; U/W Indonesia, 9 October 2014

What caught my eye? v.29 - China’s city vs global city, 18 September 2014


12 May 2017 24

What caught my eye? v.28 - Unstoppable China; EM equity rally, 9 September 2014

Global Liquidity - Most measures are looking better, 21 August 2014

ASEAN at the crossroads - Complex choices; uncertain outcomes, 18 August 2014

Phils – Fading optimism - ST concerns overshadow LT story, 31 July 2014

What caught my eye? v.27 - Importance of Trust; China’s rerating, 29 July 2014

Trade – Waiting for Godot - Small pick-up but no robust cyclicality, 18 July 2014

Rights, Wrongs & Returns - Higher rates or perhaps no rates, 15 July 2014

What caught my eye? v.26 - Oil, geopolitics & family formation, 3 July 2014

What caught my eye? v.25 - Value - many ways to skin a cat, 23 June 2014

What caught my eye? v.24 - Financial stability & catch 22, 13 June 2014

What caught my eye? v.23 - Reforms: who will & who will not, 30 May 2014

What caught my eye? v.22 - Upgrades and stagflations, 21 May 2014

Coups & Martial laws - Not necessarily a bad choice, 20 May 2014

What caught my eye? v.21 - China tourism; Portfolio update, 12 May 2014

What does FIC market tell equity investors? - All quiet on the Western front, 9 May 2014

What caught my eye? v.20 - Investments & geopolitical risks, 29 April 2014

What caught my eye? v.19 - Liquidity in its various forms, 16 April 2014

Rights, Wrongs & Returns - Policy errors, cyclicality & EM volatility, 28 March 2014

FOMC – Impact on EMs - Higher US$, rates and lower demand, 20 March 2014

Difficult case of Indonesia - Euphoria vs. terms of trade & liquidity, 17 March 2014

What caught my eye? v.18 - Is China unravelling? Not Yet, 11 March 2014

“Each unhappy family is unhappy in its own way” - Ukraine, Thailand, Argentina, et al, 3

March 2014

DM vs. EM push & pull - Beware what you wish for, 26 February 2014

Bond Yields & Equities - The question of foreign demand, 24 February 2014

What caught my eye? v.17 - Is the Philippines for real?, 24 February 2014

What caught my eye? v.16 - Third industrial revolution & its impact, 12 February 2014

What caught my eye? v.15 - Investment Cycles & Funds Flows, 17 January 2014

Liquidity trap vs. Stagflation - China vs India – tough choice, 15 January 2014

What caught my eye? v.14 - Would Indian corporates invest?, 6 January 2014

Tapering is on, so is the put - What is likely to happen to volatilities?, 19 December 2013

Investment Outlook – 2014 - “Out with the old and in with the new” Is it 1998 or 1999 – Buy all

or Sell all?, 11 December 2013

What caught my eye? v.13 - China's savings conundrum & Plenum, 25 November 2013

What caught my eye? V.12- Hardware vs software; China's "divide & conquer” reform

agenda?, 6 November 2013

What caught my eye? v.11 - Leading indicators and “blind alleys”, 28 October 2013

What caught my eye? v.10 - Corporate leverage – how much of a problem?, 3 October 2013

Asia Strategy - When you rely on asset bubbles, what else do you do?, 19 September 2013

What caught my eye? v.9 - Rmb: How exposed is China?, 18 September 2013

What caught my eye? v.8 - In and out of “shadows”, 6 September 2013

What caught my eye? v.7 - If something cannot go on forever, it will stop, 22 August 2013

ASEAN 4 – risks & returns - Kaleidoscope of themes, 16 August 2013

What caught my eye? v.6 - China industrial sector – the Good, the Bad and the Ugly, 31 July

2013

Reviewing Tactical Portfolio - Tough choices: damned if you do and damned if you don't in a

slowing world, 10 July 2013

What caught my eye? v.5 - Liquidity – receding tide, 5 July 2013

What caught my eye? v.4 - Central Bank’s “chicken run”, 27 June 2013

What caught my eye? v.3 - QEs to eternity whether successful or not, 12 June 2013

What caught my eye? v.2 - Korea - is China or Japan a greater threat?, 29 May 2013

What caught my eye? - Inflation falling everywhere, 22 May 2013

Rights, Wrongs & Returns - Bears and the Investment Clock, 24 April 2013

DXY rises and Yen falls - The pincer movement for EM equities, 8 April 2013

APAC – Competitive Edge - Separating winners from losers, 21 March 2013

Walk on the wild side - Macro threats - what, if and when, 4 March 2013


12 May 2017 25

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand

Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2017

AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for global coverage by Macquarie, 8.20% of stocks followed are investment banking clients)

Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for global coverage by Macquarie, 8.25% of stocks followed are investment banking clients)

Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for global coverage by Macquarie, 8.00% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited and Macquarie Capital Limited, Taiwan Securities Branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Macquarie Equities South Africa (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. 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Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. The date and timestamp for above share price and market cap is the closed price of the price date. #CLOSE is the final price at which the security is traded in the relevant exchange on the date indicated. Country-specific disclaimers: Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organisation of the Australian Securities Exchange. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd, a participating organisation of the Toronto Stock Exchange, TSX Venture Exchange & Montréal Exchange. Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of FINRA, accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd in the United States and sent to US persons. Any US person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets


12 May 2017 26

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Asia Research Head of Equity Research

Peter Redhead (Global – Head) (852) 3922 4836

Jake Lynch (Asia – Head) (852) 3922 3583

David Gibson (Japan – Head) (813) 3512 7880

Conrad Werner (ASEAN – Head) (65) 6601 0182

Automobiles/Auto Parts

Janet Lewis (China, Japan) (813) 3512 7856

James Hong (Korea) (822) 3705 8661

Amit Mishra (India) (9122) 6720 4084

Financials

Scott Russell (Asia) (852) 3922 3567

Dexter Hsu (China, Taiwan) (8862) 2734 7530

Keisuke Moriyama (Japan) (813) 3512 7476

Chan Hwang (Korea) (822) 3705 8643

Suresh Ganapathy (India) (9122) 6720 4078

Sameer Bhise (India) (9122) 6720 4099

Gilbert Lopez (Philippines) (632) 857 0892

Ken Ang (Singapore) (65) 6601 0836

Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates

David Ng (China, Hong Kong) (852) 3922 1291

Conrad Werner (Singapore) (65) 6601 0182


Consumer and Gaming

Linda Huang (Asia, China, Hong Kong) (852) 3922 4068

Zibo Chen (China, Hong Kong) (852) 3922 1130

Terence Chang (China, Hong Kong) (852) 3922 3581

Sunny Chow (China, Hong Kong) (852) 3922 3768

Satsuki Kawasaki (Japan) (813) 3512 7870

Kwang Cho (Korea) (822) 3705 4953

KJ Lee (Korea) (822) 3705 9935

Stella Li (Taiwan) (8862) 2734 7514

Amit Sinha (India) (9122) 6720 4085

Fransisca Widjaja (65) 6601 0847 (Indonesia, Singapore)

Karisa Magpayo (Philippines) (632) 857 0899

Chalinee Congmuang (Thailand) (662) 694 7993

Emerging Leaders

Jake Lynch (Asia) (852) 3922 3583

Aditya Suresh (Asia) (852) 3922 1265

Timothy Lam (China, Hong Kong) (852) 3922 1086

Kwang Cho (Korea) (822) 3705 4953

Corinne Jian (Taiwan) (8862) 2734 7522

Marcus Yang (Taiwan) (8862) 2734 7532

Conrad Werner (ASEAN) (65) 6601 0182

Industrials

Janet Lewis (Asia) (813) 3512 7856

Patrick Dai (China) (8621) 2412 9082

Kunio Sakaida (Japan) (813) 3512 7873

William Montgomery (Japan) (813) 3512 7864

James Hong (Korea) (822) 3705 8661

Benson Pan (Taiwan) (8862) 2734 7527

Inderjeetsingh Bhatia (India) (9122) 6720 4087

Justin Chiam (Singapore) (65) 6601 0560

Internet, Media and Software

Wendy Huang (Asia, China) (852) 3922 3378

David Gibson (Asia, Japan) (813) 3512 7880

Hillman Chan (China, Hong Kong) (852) 3922 3716

Soyun Shin (Korea) (822) 3705 8659

Abhishek Bhandari (India) (9122) 6720 4088

Oil, Gas and Petrochemicals

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Aditya Suresh (Asia, China, India) (852) 3922 1265

Anna Park (Korea) (822) 3705 8669

Isaac Chow (Malaysia) (603) 2059 8982

Pharmaceuticals and Healthcare

Abhishek Singhal (India) (9122) 6720 4086

Wei Li (China, Hong Kong) (852) 3922 5494

Property

Tuck Yin Soong (Asia, Singapore) (65) 6601 0838


Raymond Liu (China, Hong Kong) (852) 3922 3629

Wilson Ho (China) (852) 3922 3248

William Montgomery (Japan) (813) 3512 7864


Abhishek Bhandari (India) (9122) 6720 4088

Aiman Mohamad (Malaysia) (603) 2059 8986

Kervin Sisayan (Philippines) (632) 857 0893

Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining

Polina Diyachkina (Asia, Japan) (813) 3512 7886

Coria Chow (China) (852) 3922 1181

Anna Park (Korea) (822) 3705 8669

Sumangal Nevatia (India) (9122) 6720 4093

Technology

Damian Thong (Asia, Japan) (813) 3512 7877

George Chang (Japan) (813) 3512 7854

Daniel Kim (Korea) (822) 3705 8641

Allen Chang (Greater China) (852) 3922 1136

Jeffrey Ohlweiler (Greater China) (8862) 2734 7512

Patrick Liao (Greater China) (8862) 2734 7515

Louis Cheng (Greater China) (8862) 2734 7526

Kaylin Tsai (Greater China) (8862) 2734 7523

Telecoms

Soyun Shin (Korea) (822) 3705 8659

Prem Jearajasingam (ASEAN) (603) 2059 8989

Kervin Sisayan (Philippines) (632) 857 0893

Transport & Infrastructure

Janet Lewis (Asia) (852) 3922 5417


Azita Nazrene (ASEAN) (603) 2059 8980

Utilities & Renewables

Patrick Dai (China) (8621) 2412 9082

Candice Chen (China) (8621) 2412 9087

Alan Hon (Hong Kong) (852) 3922 3589


Prem Jearajasingam (Malaysia) (603) 2059 8989

Karisa Magpayo (Philippines) (632) 857 0899

Commodities

Colin Hamilton (Global) (44 20) 3037 4061

Ian Roper (65) 6601 0698

Jim Lennon (44 20) 3037 4271

Lynn Zhao (8621) 2412 9035

Matthew Turner (44 20) 3037 4340

Economics

Peter Eadon-Clarke (Global) (813) 3512 7850

Larry Hu (China, Hong Kong) (852) 3922 3778

Quantitative / CPG

Gurvinder Brar (Global) (44 20) 3037 4036

Woei Chan (Asia) (852) 3922 1421

Danny Deng (Asia) (852) 3922 4646

Per Gullberg (Asia) (852) 3922 1478

Strategy/Country

Viktor Shvets (Asia, Global) (852) 3922 3883

Chetan Seth (Asia) (852) 3922 4769


Peter Eadon-Clarke (Japan) (813) 3512 7850

Chan Hwang (Korea) (822) 3705 8643

Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512


Jayden Vantarakis (Indonesia) (6221) 2598 8310

Anand Pathmakanthan (Malaysia) (603) 2059 8833


Conrad Werner (Singapore) (65) 6601 0182

Passakorn Linmaneechote (Thailand) (662) 694 7728

Find our research at Macquarie: www.macquarieresearch.com/ideas/ Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales

Miki Edelman (Global) (1 212) 231 6121

Jeff Evans (Boston) (1 617) 598 2508

Jeffrey Shiu (China, Hong Kong) (852) 3922 2061

Sandeep Bhatia (India) (9122) 6720 4101

Thomas Renz (Geneva) (41 22) 818 7712

Riaz Hyder (Indonesia) (6221) 2598 8486

Nick Cant (Japan) (65) 6601 0210

John Jay Lee (Korea) (822) 3705 9988

Nik Hadi (Malaysia) (603) 2059 8888

Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d

Paul Colaco (San Francisco) (1 415) 762 5003

Amelia Mehta (Singapore) (65) 6601 0211

Angus Kent (Thailand) (662) 694 7601

Ben Musgrave (UK/Europe) (44 20) 3037 4882

Christina Lee (UK/Europe) (44 20) 3037 4873

Sales Trading

Adam Zaki (Asia) (852) 3922 2002

Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d

Suhaida Samsudin (Malaysia) (603) 2059 8888

Michael Santos (Philippines) (632) 857 0813

Chris Reale (New York) (1 212) 231 2555

Marc Rosa (New York) (1 212) 231 2555

Justin Morrison (Singapore) (65) 6601 0288

Daniel Clarke (Taiwan) (8862) 2734 7580

Brendan Rake (Thailand) (662) 694 7707

Mike Keen (UK/Europe) (44 20) 3037 4905

This publication was disseminated on 12 May 2017 at 05:20 UTC.

Documents

GLOBAL What caught my eye? v - jrj.com.cnpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2017/5/12/c3c4f71e-4fc9-4ce9-… · Macquarie Research What caught my eye? v.75 12 May 2017 2 Mixed fortunes