- Equity market near the bottom "Policy headwinds that had caused turbulence in the market are finally settling, along with downward trending economic growth. Policy overhangs and a growth slowdown are key downside risks in 2H."
- Signs of market stabilization "Macro indicators in general are supportive for the market. The margin squeeze has probably reversed softening commodity prices, currency appreciation, and still elevated CPI inflation. Liquidity stretch is likely near its end. Economic slowdown is a risk, but often lagging the market. We expect growth to bottom in 4Q this year or 1Q next year."
- Market trend "The Shanghai A-share market has tested the 2200-2500 range recently as expected. The market may remained mixed in the near term before a liquidity rally is formed. We expect the Shanghai A-share index to touch the range of 2800-3100 before year-end, likely outperforming the H-share market in the second half of the year."
- Sectoral preference "The market will likely remain selective. In general, we overweight consumer, insurance, transportation, healthcare, autos, techs, and electrical machinery & equipment, while we underweight property, banks, and materials."
- Multi-Strategy: Support for China market "1) HSCEI has remained flat since mid-
May 2010, 2) Liquidity should ease, 3) Rates curve suggests little hikes, 4) HSCEI IVOL term structure shows the market is expected to be less volatile going forward, and 5) the USD rally appears to be over."
Citigroup China Equity Strategy 20100726
Using CAPE to place a 'through-cycle' value on Asian markets and sectors
- "We are often asked the question of are markets cheap or expensive at the moment. The answer of course depends on what earnings metric is used."
- "The problem with using forecast earnings for the region right now is that they quite simply look too high. They are currently higher than when they peaked in ’08 and the outlook implied by aggregate notional earnings right now is that earnings will be greater next year than ever before – has the earnings outlook really ‘never been better’?"
- "But if we turn to use historical earnings for our market PE, then we are going to be using numbers that are rather depressed by recent trend standards – biasing valuations to look more expensive."
- "An alternative is to use a Cyclically Adjusted PE (CAPE, as first written about by Graham & Dodd some 70 years ago) which use an average of actual earnings typically over the prior 10 years."
- "A 10-year CAPE currently is at about the same level that we get using a ‘low-cycle’ regression basis and is arguably best used to remove the exaggerated ‘bubble period’ for earnings in and around 2008."
- "We suspect that the through-cycle earnings for Asia are in fact somewhere between the 5-year and 10-year averages and have valued countries and sectors in the region accordingly."
- "On this basis we flag the cheap and expensive countries and sectors summarised in the table to the right."
JPMorgan Cyclically Adjusted Valuations 20100727
- "The problem with using forecast earnings for the region right now is that they quite simply look too high. They are currently higher than when they peaked in ’08 and the outlook implied by aggregate notional earnings right now is that earnings will be greater next year than ever before – has the earnings outlook really ‘never been better’?"
- "But if we turn to use historical earnings for our market PE, then we are going to be using numbers that are rather depressed by recent trend standards – biasing valuations to look more expensive."
- "An alternative is to use a Cyclically Adjusted PE (CAPE, as first written about by Graham & Dodd some 70 years ago) which use an average of actual earnings typically over the prior 10 years."
- "A 10-year CAPE currently is at about the same level that we get using a ‘low-cycle’ regression basis and is arguably best used to remove the exaggerated ‘bubble period’ for earnings in and around 2008."
- "We suspect that the through-cycle earnings for Asia are in fact somewhere between the 5-year and 10-year averages and have valued countries and sectors in the region accordingly."
- "On this basis we flag the cheap and expensive countries and sectors summarised in the table to the right."
JPMorgan Cyclically Adjusted Valuations 20100727
China Interbank Liquidity Monitor
- PBoC withdrew liquidity last week: "After eight consecutive weeks’ (since late May) liquidity injection, totaling Rmb957bn, the PBoC drained Rmb101bn of net liquidity from the market last week (Exhibit 1)."
- Light redemption pressures explained the net withdrawal: "The PBoC issued Rmb125 bn of bills (Rmb45 bn of 1-year bills last Tuesday and Rmb80 bn of 3-month bills last Thursday), substantially below the issuance (Rmb240 bn) of the week before last. Much
lighter redemption pressure (Rmb39 bn last week vs. Rmb190 bn in the week before last) resulted in a net liquidity withdrawal of Rmb86 bn from bill issuance last week (Exhibit 3). Meanwhile, the PBoC sold Rmb50 bn of 91-day repo. Given Rmb35 bn of matured repo, the
PBoC drained a further Rmb15 bn of liquidity from repo operations. The reference yields of 3-month and 1-year PBoC bills remained unchanged at 1.57% and 2.093%, respectively (Exhibit 4). Largely bound by the reference yield of the 3-month bill rate, the 91-day repo rate stayed constant at 1.57% as well (Exhibit 6)."
- Further easing liquidity: "Interbank liquidity has continued to ease, with the 1-month SHIBOR sliding to 2.301% from the recent peak at 4.053% (Exhibit 2). This noticeable correction may have reflected the following factors: 1) liquidity injection by the PBoC; 2) completion of mid-year inspection on loan/deposit ratio; and 3) possible return of capital inflows."
- What’s next: "Given the relatively light redemption pressures, the scale of bill issuance and repo sales should be modest in the coming weeks (Exhibit 7). In light of the improved market liquidity situation, we expect the PBoC to continue with mild liquidity drainage in coming weeks to help stabilize the money market rates."
Morgan Stanley China Economics 20100726
- Light redemption pressures explained the net withdrawal: "The PBoC issued Rmb125 bn of bills (Rmb45 bn of 1-year bills last Tuesday and Rmb80 bn of 3-month bills last Thursday), substantially below the issuance (Rmb240 bn) of the week before last. Much
lighter redemption pressure (Rmb39 bn last week vs. Rmb190 bn in the week before last) resulted in a net liquidity withdrawal of Rmb86 bn from bill issuance last week (Exhibit 3). Meanwhile, the PBoC sold Rmb50 bn of 91-day repo. Given Rmb35 bn of matured repo, the
PBoC drained a further Rmb15 bn of liquidity from repo operations. The reference yields of 3-month and 1-year PBoC bills remained unchanged at 1.57% and 2.093%, respectively (Exhibit 4). Largely bound by the reference yield of the 3-month bill rate, the 91-day repo rate stayed constant at 1.57% as well (Exhibit 6)."
- Further easing liquidity: "Interbank liquidity has continued to ease, with the 1-month SHIBOR sliding to 2.301% from the recent peak at 4.053% (Exhibit 2). This noticeable correction may have reflected the following factors: 1) liquidity injection by the PBoC; 2) completion of mid-year inspection on loan/deposit ratio; and 3) possible return of capital inflows."
- What’s next: "Given the relatively light redemption pressures, the scale of bill issuance and repo sales should be modest in the coming weeks (Exhibit 7). In light of the improved market liquidity situation, we expect the PBoC to continue with mild liquidity drainage in coming weeks to help stabilize the money market rates."
Morgan Stanley China Economics 20100726
A Rocky Road Towards Asia FX Appreciation
- Asia FX in a range: NT negative headwinds are offset by other (4) factors — "With market/Asian CBs adjusting for slower growth momentum, and no real catalyst to reverse sentiment, we think near-term (NT) headwinds for Asian FX will remain high. However, the presence of medium-term support factors should help provide offsetting bids to Asia FX, translating to more meaningful appreciation once double-dip fears ease and risk stabilizes."
- No 1#: Asia’s strong public finances support debt-related capital inflows —
"Inflows into Asian credits and LC bonds have been very resilient despite periods of risk aversion, and these trends should continue. Asia’s fiscal and external liquidity trends should remain relatively solid, prompting more upward ratings momentum (e.g. CH, HK, ID, IN (LC rating), and SL) vs. downgrade momentum in Europe."
- No 2#: Positive and rising rate differentials should be supportive of Asian FX —
"Asian CBs will likely continue to gradually de-link from the Fed given growth dynamics, lack of deflationary forces, unimpaired financial sector (credit growth still picking up in IN, ID, MY, SG, and TW), and bias by some CBs to use monetary policy to address asset bubbles. China is an exception - we now expect no hike this year."
- No 3#: Asia growth outperformance should continue to boost capital flows —
"While growth momentum in the Asia region is slowing, relative growth differential vs. rest of the world is unlikely to meaningfully change – net direct investment to the region is forecast to recover significantly this year, while inflows into EM funds (vs. developed markets) have remained resilient."
- No 4#: Asia FX undervaluation persists as external surpluses to grow — "Asia’s
official FX reserves are still close to their historic highs (despite revaluation loss on EUR in May) and will likely resume their climb in 2H 2010. Cost/risks of suppressing currencies will likely rise over time and pressure on China towards faster RMB appreciation is unlikely to cease."
- Macro Strategy — "1) Asia FX – we prefer IDR (high carry, low vol), KRW (cheap) and remove long SGDMYR (SGD at topside of the NEER band); 2) Asia rates – see some room for curve flattening in Indonesia; 3) Asia (sovereign) credits – look for opportunities to go long Sri Lanka$ amid expectations of new supply as a catch-up play vs. the strong rally in Indon$ and ROP$s."
Citigroup Asia Macro Strategy Outlook 20100723
- No 1#: Asia’s strong public finances support debt-related capital inflows —
"Inflows into Asian credits and LC bonds have been very resilient despite periods of risk aversion, and these trends should continue. Asia’s fiscal and external liquidity trends should remain relatively solid, prompting more upward ratings momentum (e.g. CH, HK, ID, IN (LC rating), and SL) vs. downgrade momentum in Europe."
- No 2#: Positive and rising rate differentials should be supportive of Asian FX —
"Asian CBs will likely continue to gradually de-link from the Fed given growth dynamics, lack of deflationary forces, unimpaired financial sector (credit growth still picking up in IN, ID, MY, SG, and TW), and bias by some CBs to use monetary policy to address asset bubbles. China is an exception - we now expect no hike this year."
- No 3#: Asia growth outperformance should continue to boost capital flows —
"While growth momentum in the Asia region is slowing, relative growth differential vs. rest of the world is unlikely to meaningfully change – net direct investment to the region is forecast to recover significantly this year, while inflows into EM funds (vs. developed markets) have remained resilient."
- No 4#: Asia FX undervaluation persists as external surpluses to grow — "Asia’s
official FX reserves are still close to their historic highs (despite revaluation loss on EUR in May) and will likely resume their climb in 2H 2010. Cost/risks of suppressing currencies will likely rise over time and pressure on China towards faster RMB appreciation is unlikely to cease."
- Macro Strategy — "1) Asia FX – we prefer IDR (high carry, low vol), KRW (cheap) and remove long SGDMYR (SGD at topside of the NEER band); 2) Asia rates – see some room for curve flattening in Indonesia; 3) Asia (sovereign) credits – look for opportunities to go long Sri Lanka$ amid expectations of new supply as a catch-up play vs. the strong rally in Indon$ and ROP$s."
Citigroup Asia Macro Strategy Outlook 20100723
The global air transport sector – emerging like a phoenix from the ashes
- "The image of phoenix, the mythical bird that burns to ashes and then re-emerges again and again, has already been cited frequently and is therefore undoubtedly far from original. It does, however, perfectly describe recent developments in the global air transport sector. After all, the industry has recovered from its severe crisis with impressive speed, is posting high growth rates once again and has in the meantime even broken previous traffic volume records. Nevertheless, not all is rosy in the garden as the aviation sector continues to face serious problems despite the economic upturn."
DeutscheBank Talking Point 20100726
DeutscheBank Talking Point 20100726
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