Credit Suisse, in its global equity strategy report, has raised its recommendation on emerging markets from benchmark to overweight, with Asia ex-Japan showing the best economic fundamentals. The report cites the region's high levels of economic policy flexibility, which is available due to a current account surplus totalling 3% of GDP, a budget deficit of just 1% and a government debt-to-GDP ratio of 31%. Asia ex-Japan also has relatively strong balance sheets compared to the rest of the world, especially in the banking sector, and will be the main beneficiary of the collapse in commodity prices.
The Swiss bank also highlights the fact that Asia ex-Japan is currently at a 20% price-to-cash discount to developed markets. And when global indicators start to pick up again, which the bank believes will happen in the first quarter of next year, the region will outperform two months ahead of the rest of the world û if the future is similar to previous global slowdowns.
ôUse this quarter's volatility to add equity exposure in Asia,ö says J.P. Morgan in its look ahead to 2009. With all sectors hit hard this year, the US bank recommends investors to focus on defensive domestic sectors, such as financials. Although it expects cyclical industries and commodities to have ôsubstantiallyö lower profits in the last quarter of this year, J.P. Morgan points out that it is these sectors that are usually the first to recover from a downturn. To take advantage of this theme, it recommends export-related cyclicals, such as automobiles and technology stocks, over commodities. The valuations on Taiwanese tech stocks are eye-catching, the report notes.
This begs the question of how long the downturn could last. The good news is that J.P. Morgan holds that the worst of the financial crisis is behind us. The bad news is that its base case scenario assumes the worst US consumer recession since the end of the Second World War, with a synchronised global recession in the developed world. Growth in emerging markets such as Asia will not be unaffected, but the risk premium over developed economies will decrease, especially for domestic businesses.
One country will be at the forefront of the recovery, according to J.P. Morgan: ôChina is a must buy today. A year ago investors underestimated the negative impact of policy on growth û do not make the same mistake today.ö Other countries that are running stimulatory programmes û such as Taiwan, Hong Kong and Singapore û can also expect to be on the mend quicker than their neighbours that do not have similar programmes in place.
Within the region, the countries to focus on are those with a current account surplus and large financial reserves as they should have lower borrowing costs, says J.P. Morgan. Countries such as Australia, India, Indonesia, and Korea will require external capital, which will link them to the global credit crisis. These are the underperfomers in the region.
With regard to specific stocks to consider during the downturn, BNP Paribas has produced a list of ôsurvivors and thriversö. Companies included in the list will not only weather the storm, but come through it with a greater competitive edge. These are large-cap companies, which account for at least 3% of their country index. The French bank also looked for companies with a good track record of managing their balance sheets. These were the survivors. To thrive as well, a company has to have the ability to capture market share or be a consolidator during the crisis. The list consists of 28 companies.
One company on the list is HSBC, which is described as ôthe ultimate Armageddon Bankö. Reasons for its inclusions are: its ability to always outperform in down cycles û as it did in 1994, 1998 and 2000; its ôphenomenalö ability to generate capital; and its high levels of liquidity. Other financials on the list are China Merchants Bank and Thailand's Siam Commercial Bank.
In the technology sector, there is Samsung Electronics, which, according to BNP Paribas, has the ôstrongest balance sheet in techö. Its inclusion on the list is due to a healthy balance sheet, a strong cash flow, and number one position in a range of IT products. The fact that its stock trades at around 1.3 times its estimated 2008 book value û the lowest it has been since 2001 û also makes it attractive. Samsung is set to beat its competitors in the long term since ôthe company is powerfully leveraged when the memory market recovers; and Samsung is increasing its dominance with industry-beating profitability in all major product lines û semiconductors, LCD, handset, TVö. The technology sector features strongly on the list, including major players such as TSMC, MediaTek and Infosys Technologies.