Equity Strategy 2H 2010 & Asset Class Returns As At end-June 2010

Just passed the halfway mark. REITs finally took a hit, is this the beginning of the double dip. Do I believe in the double dip, yes of course. Only that the dip will be more restrained, not a significant or prolonged dip. Things move in cycles and like pendulums. Share prices are the same, they will sing to one side, over swing a bit and the correct. This is because the data are but collection of human behaviour, and masses will never react perfectly. They will chase a share price that is running until it overshoots, and attract sellers to come in. When the balance shifts to the other side, you will see it overshooting on the downside again.

June was another rough month for risky assets, although the losses were considerably deeper with U.S. stocks from a dollar-based return perspective. REITs also took a hit: for the first time since the opening months of 2009, real estate securities dropped by more than 5% for the second month running.

Bonds held up well in June. This is probably due to the threat of deflation taking a toll on investor sentiment, the safety of fixed-income (even at unusually low yields) attracted capital flows last month like moths to a flame.

US equity took the hardest hit in June. Was this an adjustment to the European crisis and the Euro crisis? Probably. Was it trying to discount a flattening of recovery, probably. Was it due to funds closing their books and squaring off positions and waiting for the right levels to reloan in 2H, absolutely.

But what we all should be focusing at is the YTD figures. Commodities are down by nearly 10% and foreign developed stocks have retreated by more than 13% in dollar terms—the steepest decline for the major asset classes on a year-to-date basis through June’s close. There has been some flight to reserve currency assets, but US equity did follow suit, much of its YTD losses came in the month of June alone.

So we are giving back all gains this year and more. Is this a risk aversion period? I think the sell in May rang true and it coincided with the Greek, Hungarian and Portuguese malaise, followed by the weakening Euro, which threatened demand for exports from the rest of the world.

China had to do a lot of braking in its domestic economy and the Shanghai index reflected that for the past 3 months. Now they have to contend with pressures to have a stronger yuan as well.

Some may cite the fact that many governments have piled on too much debt and that will come back to haunt us. Well yes, but not so soon. No one is going to put a gun to the US and ask them to lower their debts within the next couple of years. While the same seems to be happening in Europe, it is mainly a sovereign issue not a corporate issue.

We are actually still in the midst of a newly created liquidity bubble. Thanks to Bernanke and many of the other governments, we have printed and poured too much liquidity into the global financial system. We are also locked in with globally benign interest rates. Tell me what do the above ingredients make?

But why the recent pullback. Well, even when you are driving a Porsche, you are limited to how far and fast you can go if there is a traffic jam. Be sure, we have a highly powered underlying liquidity revving its engines. We just need the traffic to clear up a bit: Euro steadying a bit; unemployment growth flattening out but not down trending aggressively; corporates continuing to put out good quarterlies; etc.

I have changed my views on the Euro, I think it will stablise here 1.25-1.30 and not go any closer to 1.00 to the USD. Herein lies the key. The Euro crisis may have blighted our views too much. Look closer, most of Europe's top companies are benefiting strongly overall. We missed the picture that this is more a sovereign thing. Many of the companies are already getting an 18%-20% boost in receipts (added competitiveness) thanks to the weaker Euro - we all know that that is more than double the net margins of most companies.



European industrial production actually rose 0.8% in April much better than the average forecast of 0.5%. One of the better leading indicators of economic activity is cargo carriers, Fedex's recently reported that Europe is seeing solid activity, very much different from the picture the media would have us believe.

China may be the weak link in 2H. In addition to the yuan, the high interest rates, the yet to subside property bubble, we now have a snowballing labour issue. The Honda-Foxconn developments should ensure a cascading and rippling effect on all labour wage demands across China, watch it balloon in the coming weeks.

I think US equity and emerging markets equity will be quite positive for most of 2H2010. I see the Dow testing 11,500 and the FBMKLCI testing 1,450 before the year is over.

Asian Equities In 2010 - A Survey Of Views & My Take

Will the Rally Continue or Will a Correction Follow?

Citi expects 9-14% increase in Asian equities in 2010, with North Asia (especially Korea and Taiwan) outperforming South Asia. Asset market returns slow as a recovery takes hold, as returns underperform expected earnings increases. Technology and bank earnings are outperforming other sectors. The U.S. dollar and U.S. interest rate normalization pose the greatest risks to Asian market liquidity.

DBS expects index returns of at least 16%, based on expected 27% earnings growth for 2010 and 16% for 2011, keeping valuations neutral. The low global interest rate environment, expectations of Asian currency appreciation could push markets further. Sectors benefiting from stronger Chinese consumption should outperform and the energy sector is supported by government investment. DBS is overweight China, Taiwan and Singapore, Neutral on India, Hong Kong and Korea while underweight Malaysia, Indonesia and Thailand. U.S. rate normalization is a risk. Taiwan and Singapore have biggest chance for earnings upgrades as expectations have not yet returned to pre-crisis levels given the depth of the economic correction.

Upsides: Better-than-expected earnings reports, relatively healthier macroeconomic fundamentals, aggressive fiscal stimulus spending, capital inflows and ample liquidity will have positive impact. Equities are also attractive for foreign investors relative to debt markets amid increasing bond issuance.

Downsides: Foreign Institutional Investors concerned about the U.S. economic recovery and global liquidity might resort to profit-taking. Risk about asset bubbles, tightening measures by central banks and rising valuations might affect both domestic and foreign investors.

Analyst Johnna Chau, Citi: "Stocks do well when faced with upward revisions" of earnings. South Korea and Taiwan, and sectors like technology, consumer discretionary and materials remain attractive.

Analyst Joanne Goh, DBS: Following the strong rally since March 2009, profit taking may lead to a correction (though not severe) due to worries over high valuations, withdrawal of stimulus measures and asset bubbles. Possible macro policy changes in China might bring some volatility in Hong Kong and China. But export-oriented countries with high industrial and technology exposure (Singapore, Thailand, Korea and Taiwan) will benefit during the course of synchronized global recovery.

FT's Lex: In the past, Asia's stock market performance was highly correlated with that of western counterparts. However, Asian equities may plot a more "independent course" backed by less leveraged economy, better capitalized banking sector, huge FX reserves and healthier fiscal position.

EIU: Given the region's ultimate reliance on exports to the U.S. and EU, investor sentiment will remain susceptible to economic setbacks in those markets.

Background

As of end April 2009, market capitalization of Asian Pacific markets (US$10.2 trillion) had exceeded that of European markets (US$9.3 trillion, including Africa and the Middle East) as Asian stock prices soared at a faster pace than the European ones.

Banks remain the single largest sector in Asian equity markets. However, financials' share has decreased to 20.1% as of June 2009 from 43% in 1975. In opposite, the share of cyclicals has risen to 38.7% (including basic materials, industrials, oil & gas, and technology) from 18% (industrials) in 1975.

2008 Review: The peak-to-trough decline in Asian equities in 2008 of more than 70% for some markets, surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took the total net redemptions during January-October 2008 to a record high such that all money that had flown in during 2007 flowed out.

Market Integration: The correlation between U.S. and Asian markets picked up sharply in H2 2008 (peaking in mid-October 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with U.S. markets.

Government intervention: Amid the global credit crisis and capital outflows in Q4 2008, several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, and directing government funds to buy shares.

10-year government bond yield as of September 7, 2009: Indonesia: 10.6%, Vietnam: 10.0%, the Philippines: 7.9%, South Korea: 5.4%, Malaysia: 4.2%, Thailand: 3.7%, China: 3.5%, Hong Kong: 2.4%, Singapore: 2.5%, Japan: 1.4%.

ADB: Most government bond yield curves in the region have steepened and have shifted upward through early-July in 2009, due to surging liquidity as governments issue new debt to finance fiscal stimulus, expectations of future inflationary pressures from increasing liquidity and improving expectation of economic recovery.

Many governments seeking to sell bonds to foreign investors including India, Malaysia, Indonesia, Vietnam, Philippines have been met with a tepid response so far due to global factors (risk aversion in EMs in general, credit crunch, flight to safety to U.S. treasuries) and domestic factors (narrowing interest rate differential with the U.S. due to ongoing policy rate cuts by Asian central banks, slowing growth).

Rising government bond issues will pose challenges to companies turning to local markets for refinancing and raising new funds as firms already face tight access to credit in domestic and foreign capital markets.

Analyst Michael E. Love, Moody's: In developed economies, such as Japan, Korea, Australia and New Zealand, yields on the benchmark 10-year notes have risen as government's tap debt markets to fund fiscal deficits. In emerging markets, yields have varied from country by country, with government borrowing, monetary easing and capital inflows exerting different effects. In Indonesia, the yield on the 10-year note has trended downward as the stock market has surged and the central bank has given strong hints more rate cuts are forthcoming. In Malaysia, Thailand and India, where central banks have less room to cut rates, yields have trended up.

During late 2008 and early 2009, heightened global risk aversion and investor redemption from emerging markets have sparked capital outflows from Asia and hence currency depreciation. Since March 2009, however, all major Asian currencies are on an appreciating path, backed by capital inflows, improving liquidity conditions, the weakening U.S. dollar (USD) and sustainable trade balances. However, appreciation has been contained by central bank intervention, undoing the reduction in global imbalances during the crisis and reducing hopes that Asia will give up its currency policy to rebalance domestic and global growth.

The YTD currency performance as of October 13, 2009: The best-performers-> Thailand: 4.23%, India: 4.89%, South Korea: 7.36%, Indonesia: 19.81%, New Zealand: 27.54%, Australia: 28.69%. Currencies showing modest gains-> China: 0.03%, Japan: 1.01%, Taiwan: 1.61%, Malaysia: 1.86%, the Philippines: 2.10%, Singapore: 2.68%. The worst-performers-> Pakistan: -4.94%, Vietnam: -2.07%, Hong Kong: -0.01%.

Surging equity inflows: Global risk appetite has led to buoyant FII inflows into the Asian equity markets with YTD net inflows of US$14.4 billion as of June 24, 2009, significantly up from US$10.8 billion in H1 2009 and US$9.6 billion in H2 2008 (EPFR via WSJ). Rising but attractive valuations, faster economic rebound and aggressive fiscal and monetary stimulus policies have supported the rally. But any fading of global risk appetite or correction in global equity markets pose risk to Asian currencies.

Revival of global carry trade: Attractive yields and appreciation pressure on currencies offer attractive carry trade opportunities in Asia. This is supported by increasing local and foreign currency bond issues by governments to finance the rising fiscal deficits.

Economist Johanna Chau, Citi: Expecting that risk appetites sustain and the U.S. dollar remains weak in the near-term, Asian currencies will continue to appreciate, with "inflation/asset price cycle now moving higher."

Easing external balances: Asian export growth is still in negative territory though export drop has been easing since March 2009. Imports are contracting more than exports in some countries, containing risks to the trade balances. In some countries, export recovery might lag the recovery in imports and commodity prices, putting pressure on the trade balances.

Improving liquidity conditions: The USD liquidity has improved considerably in most countries compared to late 2008. Countries have access to the bilateral and Chiang Mai currency swap agreements as well as aid from bilateral and multilateral agencies and international groups.

FT: The real concern for Asia is weak USD, not a weak Chinese renminbi, as it reduces demand for Asian exports. Commodity exporting countries like Australia and Indonesia and tech exporters like Taiwan and South Korea have actually benefited from a weaker renminbi due to increasing demand from China. Manufacturing-based countries, including Malaysia and the Philippines, competing directly with China are at risk.

Analyst Philip Wee, DBS: Asian currencies will continue to appreciate, as the magnitude of capital inflows is greater than the size of central banks' interventions.

The central banks might use non-monetary measures to contain currency appreciation. Countries like Taiwan, New Zealand, Japan and South Korea have already implemented or hinted at measures to limit capital inflows and control currency conversion by firms and households.

Continued intervention is raising liquidity in Asian economies, leading to asset bubbles and inflationary pressures -- a replay of the 2003-07 cycle. The impossible trinity and inadequate sterilization will challenge the monetary policy as central banks will be forced to tighten liquidity and raise rates despite weak private and export demand.

Bloomberg: Raising interest rates to contain inflation will make the currencies even more attractive for carry-trades.

EIU: Due to weak exports, Asia will allow only a "modest" appreciation of the currencies especially as Chinese renminbi remains effectively pegged to the U.S. dollar. Allowing currency appreciation will help central banks tighten the monetary policy, reduce export-dependence and hence global imbalances.

ADB: East Asian currencies would continue to strengthen over time, but near-term outlook is highly uncertain. This is because global investors do not seem to regain pre-crisis level of the risk appetite and economic indicators in the region are still fragile. Comparing current levels of real effective exchange rates with historical averages of the past 20 years, Taiwan dollar, South Korean won and Malaysian ringgit have the greatest potential for appreciation.

My Take (which will be elaborated in my later postings): 2010 will still be good for equities in general, including Asian equities. I still see rates being kept low in developed nations, in particular the US, EU, Japan and UK. I also see USD being in a controlled weakening phase (even though you might hear otherwise whenever Obama, Geithner or the Fed try to calm the markets). That is the crux for 2010, weaker USD, which will underpin upside for US stocks, which in turn will rub off well on other markets. However, 2010 will not see as strong a performance as 2009. I still see 20% on average for Asian markets, i.e. FBM KLCI target of 1,500. Malaysia should be the outperformer in 2010 compared to other Asian markets as pressure will mount on ringgit to appreciate, causing surges of hot money into the markets. That needs to be watched diligently by Bank Negara or else we will have a recurring bubble.



p/s photos: Ishihara Atsumi

Update On Asian Equities

Overview: Asian equities have outperformed mature markets in 2009 thanks to continuous foreign institutional investor (FII) inflows amid diminishing risk-aversion among global investors and relatively resilient macroeconomic fundamentals. In September, markets continue to march upwards after seeing some volatility in August, driven by concerns that the Chinese government is tightening the credit.

As of MSCI Asia Pacific has gained 30.5% YTD as of September 16, with Sri Lanka and Indonesia as the best performers, Japan and New Zealand as the worst performers. In terms of valuations, Asian equities are no longer considered to be cheap, following the rally since March. The region's price/earnings ratio has risen significantly above its historical average. In addition, downside risks still remain in H2 2009 with revival of any global risk aversion. Economic recovery may be slower-than-expected if stimulus effects fade out and the current global recession has greater-than-expected impacts on regional economies. Also, corporates may post worse-than-expected earnings reports as Q2's improvements were largely driven by cost-cutting efforts not by a recovery in demand.

Will Asian Equities Continue to Outperform Mature Markets?

2009 MSCI Asia Pacific performance in USD terms: 30.5% YTD as of September 16, up 66.6% during March 9 - September 162009 MSCI Asia performance in USD terms: 26.7% YTD as of September 16, up 61.2% during March 9 - September 162009 MSCI Asia (excluding Japan) performance in USD terms: 54.8% YTD as of September 16, up 85.4% during March 9 - September 16Best performers (YTD as of September 16, 2009): Sri Lanka: 91.9% | Indonesia: 80.0% | Vietnam: 76.5% | India: 72.9% | China: 64.8% | Taiwan: 62.1% | Thailand: 57.9% | Pakistan: 55.8% Worst performers(YTD as of September 16, 2009): Singapore: 51.8% | South Korea: 49.7% | HK: 48.8% | the Philippines: 47.8% | Malaysia: 38.4% | Australia: 24.9% | Japan: 15.9% | New Zealand: 15.4%

In 2009: Asia's equity market (excluding Japan) have outperformed mature markets, up 54.8% YTD as of September 16 2009, while the S&P 500 Index and the U.S. Dow Jones Industrial Average rose mere 14.7% and 8.4% respectively during the same period.

Since March 2009, Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 9- September 16 period, MSCI Asia (excluding Japan) rose by 85.4%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 58.0% and 49.6% respectively.

Capital flows: Continuous FII inflows to Asian equity markets have taken net flows to a positive US$14.4 billion as of June 24 2009, significantly up from US$10.8 billion in H1 and US$9.6 billion in H2 2008. Since end-June, however, fun flows have been volatile, with inflows and outflows each recoded half of the time. In the middle of August, the region saw fund outflows the most in 24 weeks as investors start to cast doubts on Chinese rapid expansion of bank lending, which has helped regional economic recovery and asset market reflation.

Valuations: Taiwan (122.8) has the highest price/earning ratio in the region as of September 9 2009, followed by Australia (83.9). In opposite, valuations of Pakistan (12.4) and the Philippines (15.1) are among the cheapest. The P/E ratio of 32 for Asia (excluding Japan, unweighted) is significantly higher than that of U.S. equities, 19.1 for the S&P 500 and 13.7 for the Dow Jones Industrial Average.

2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out.

Market Integration: There is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with U.S. markets.

Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing government funds to buy share.

Will the Rally Continue? Or Will a Correction Follow?
Upsides: Better-than-expected earnings reports, relatively healthier macroeconomic fundamentals, aggressive fiscal stimulus spending and ample liquidity in the region would have positive impacts. Also, buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance.

Downsides: Worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater-than-expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks.

Global portfolio rebalancing toward U.S. equities, expecting "a U.S. growth spurt," will pose risks to Asian (exculding Japan) equities. U.S. equities have gained much less than Asian (excluding Japan) equities and have lower valuations.

The recovery is real. Asian equity markets will continue to have good momentum and corporate earnings may rise substantially until 2010. Liquidity conditions will support the equity market in the near-term. But authorities may have to limit further monetary and fiscal expansion as inflation may resurface before growth normalizes in the medium- to longer-term.

Risks remain, driven not by earnings but by still weak real economy. Exports and domestic demand should rebound quickly in H2 2009 to meet the forecasts and to justify V-shaped recovery. In the past, Asia's stock market performance was highly correlated with that of western counterparts. However, Asian equities may plot a more "independent course" backed by less leveraged economy, better capitalized banking sector, huge FX reserves and healthier fiscal position.

Prospects for further inflows into Asian equities remain substantial, as global portfolio continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds.

Adrian Mowat, Chief Asia Strategist, JP Morgan: Asian stocks have yet to reflect expectations for a powerful, synchronized recovery in the global economy as markets are still bearish on global growth and on emerging markets growth.

As of end April 2009, market capitalization of Asian Pacific markets (US$10.2 trillion) has come ahead of that of European markets (US$9.3 trillion, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.

Banks remain the single largest sector in Asia. However, its share has been decreased to 20.1% as of June 2009 from 43% in 1975. In opposite, the share of cyclicals has risen to 38.7% (including basic materials, industrials, oil & gas and technology) from 18% (industrials) in 1975.


p/s photos: Olivia Ong

Checkpoint For Asian Equity Rally

Asian equities have outperformed mature markets in 2009 thanks to continuous foreign institutional investor inflows amid diminishing risk-aversion among global investors and relatively resilient macroeconomic fundamentals. Since July, the markets moved further up on the back of better-than-expected corporate earnings reports.

As of August 24 2009, MSCI Asia Pacific gained 25.8% YTD with Indonesia and Sri Lanka as the best performers, Australia and New Zealand as the worst performers. However, following the rally since March, Asian equities are no longer considered to be cheap. The region's price/earnings ratio has risen significantly above its historical average. In addition, downside risks still remain in H2 2009 with revival of any global risk aversion. Economic recovery may be slower-than-expected if stimulus effects fade out and global recession has greater-than-expected impacts on regional economies. Also, corporates may post worse-than-expected earnings reports as Q2's improvements were largely driven by cost-cutting efforts not by recovery in demand. The outperformance of Asia is all the more blatant when you take out Japan, which has been one of the world's worst performer YTD. Comparatively, despite Malaysia's robust run over the past few months, the local index has been among the lesser performers of Asia.

Will Asian Equities Continue to Outperform Mature Markets?


• 2009 MSCI Asia Pacific performance in USD terms: 22.8% YTD as of August 24, up 56.7% during March 9 - August 24
• 2009 MSCI Asia performance in USD terms: 20.5% YTD as of August 24, up 53.3% during March 9 - August 24
• 2009 MSCI Asia (excluding Japan) performance in USD terms: 42.0% YTD as of August 24, up 70.0% during March 9 - August 24
• Best performers (YTD as of August 24, 2009): Indonesia: 75.3% | Sri Lanka: 68.4% | Vietnam: 67.4% | China: 64.4% | India: 62.0% | the Philippines: 52.7% | Taiwan: 48.9% | Singapore: 48.3%
• Worst performers (YTD as of August 24, 2009): Thailand: 45.2% | South Korea: 43.4% | HK: 42.7% | Pakistan: 41.3% | Malaysia: 34.0% | Japan: 19.4% | Australia: 18.9% | New Zealand: 13.0%
• In 2009: Asia's equity market (excluding Japan) have outperformed mature markets, up 46.3% YTD as of August 24 2009, while the S&P 500 Index and the U.S. Dow Jones Industrial Average rose mere 10.1% and 5.3% respectively during the same period.
• Since March 2009, Asian equity markets have witnessed a rally following a surge in U.S. markets and began to benefit from the widening valuation gap on the back of relatively resilient macroeconomic fundamentals. During the March 9- August 24 period, MSCI Asia (excluding Japan) rose by 75.1%, significantly higher than the S&P 500 Index and the Dow Jones Industrial Average which gained 51.6% and 45.2% respectively.
• Capital flows: Continuous FII inflows to Asian equity markets have taken net flows to a positive US$14.4 billion as of June 24 2009, significantly up from US$10.8 billion in H1 and US$9.6 billion in H2 2008. Since end-June, however, fun flows have been volatile, "with inflows and outflows each recoded half of the time". Particularly, during the middle of August, the region saw fund outflows the most in 24 weeks as investors start to cast doubts on Chinese rapid expansion of bank lending, which has helped regional economic recovery and asset market reflation.
• Valuations: New Zealand (356.4) has the highest price/earning ratio in the region as of August 24 2009, followed by Taiwan (94.3). In opposite, valuations of Pakistan (11.2), the Philippines (26.8) and India (18.8) are among the cheapest. In overall, the region's forward price/earning ratio is at 23 times as of mid-July, about 30% above its three-year average. The valuation gap between Asian and western stocks has also widened; the spread between eastern and western P/E rose to 8.6 in mid-July, from its three year average of 4.5 (Asia: 23x, the U.S.:16x, EU: 13x).
  
• 2008 Review: The peak-to-trough decline in Asian equities in 2008 (more than 70% for some markets) surpassed the 60% fall in local currency terms during the 1998 Asian financial crisis. Sustained outflows from offshore Asian funds took total net redemptions in Jan-Oct 2008 to a record high such that all money that flowed in during 2007 flowed out.
  
• Market Integration: There is a noticeable upward trend in the Asia-U.S. correlation with the correlation parameter picking up sharply in H2 2008 (peaking during mid-Oct 2008). However, average correlations for emerging Asian equity markets are generally higher between the region's markets than with U.S. markets.
• Government intervention: Several countries including Taiwan, Pakistan, Vietnam, Thailand intervened in the stock market by narrowing the trading band, introducing stabilization fund to contain volatility, banning short-selling, directing government funds to buy share.

Will the Rally Continue? Or Is a Correction a Real Possibility?

• Upsides: Better-than-expected earnings reports, relatively healthier macroeconomic fundamentals, aggressive fiscal stimulus spending and ample liquidity in the region would have positive impacts. Also, buying into most of the region's equity markets seems a better bet than bonds amid increasing bond issuance.
• Downsides: Worries over the U.S. economy, exit by local investors and also FIIs alarmed at greater-than-expected impact of global slowdown on Asia's growth, exports, fiscal deficits, slowing consumer spending and investment may have negative impacts. High (external) debt exposure of corporate sector in some countries and risks of real estate correction and bank profitability are additional risks.
• Morgan Stanley: "The recovery is real." Asian equity markets will continue to have good momentum and corporate earnings may rise substantially until 2010.
• UOB: Liquidity conditions will support the equity market in the near-term. But authorities may have to limit further monetary and fiscal expansion as inflation may resurface before growth normalizes in the medium- to longer-term. (August 17, 2009)
• Citigroup: Risks remain, driven not by earnings but by still weak real economy. Exports and domestic demand should rebound quickly in H2 2009 to meet the forecasts and to justify V-shaped recovery. (July 24, 2009)
  
• FT: In the past, Asia's stock market performance was highly correlated with that of western counterparts. However, Asian equities may plot a more "independent course" on the back of less leveraged economy, better capitalized banking sector, huge FX reserves and healthier fiscal position. (Lex; July 16, 2009)
• EIU: The recent rally in Asian equity markets might not continue due to still-weak real economic condition in many countries and the region's ultimate reliance on exports to the U.S. and EU, which means that financial-investor sentiment will remain susceptible to economic setbacks in those markets. (July 2, 2009)
• DBS: Prospects for further inflows into Asian equities remain substantial, as global portfolio continue to adjust from relatively underweight positions, and given cheap equity valuations relative to bonds. (June 11, 2009)
  
• Adrian Mowat, Chief Asia Strategist, JP Morgan: Asian stocks have yet to reflect expectations for a powerful, synchronized recovery in the global economy as markets are still bearish on global growth and on emerging markets growth.
  
• ADB: Given decreasing inflationary pressures and relatively healthy fiscal positions, further fiscal and monetary stimulus policies by Asian governments will able to boost the region's equity markets in H2 2009. (April 2009)

Background

• As of end April 2009, market capitalization of Asian Pacific markets (US$10.2 trillion) has come ahead of that of European markets (US$9.3 trillion, including Africa and the Middle East) as Asian stock prices sour at a faster pace than European ones.
  
• Banks remain the single largest sector in Asia. However, its share has been decreased to 20.1% as of June 2009 from 43% in 1975. In opposite, the share of cyclicals has risen to 38.7% (including basic materials, industrials, oil & gas and technology) from 18% (industrials) in 1975.

p/s photos: Sarah Song Hei Leen