Picking titan stocks in Asia's depressed markets

Two separate equity market outlook reports show Citi being underweight in emerging Asia, while Nomura pins its hopes on the regionÆs heroes and titans.
In a world where stockmarkets have given up all vestiges of predictability, markets across the world appear riskier than ever. The combined message in two recent equity outlooks for 2009, one from Citi and the other from Nomura, is to avoid Asia, or û if you do decide to invest in this region û to focus on the big players.

Citi, in its 2009 global equities outlook, holds that we are still in the early stages of a 50% decline in global corporate earnings. There are other factors that make the case for investing in shares weak: GDP forecasts are bleak, there will probably be more fund redemptions, and volatility will remain an issue. For things to swing upward, says the Citi report, we need to be closer to the bottom of the earnings cycle, and this is more likely to happen in 2010.

In this depressed world, emerging Asia does not fare well compared to the rest of the world: ôEM Asia valuations still do not look particularly attractive, and earnings momentum is unimpressive.ö Citi is therefore underweight on emerging Asia. ôCommodity-importing Asian markets still enjoy relatively high valuation rankings. Elsewhere, the European markets continue to look cheap and trade on single-digit multiples,ö the report says.

Markus Rosgen, CitiÆs Asia ex-Japan strategist, believes the negative outlook is already factored into the price of Asian equities which have a current price-to-book value of 1.2 times as opposed to three times last year. But, he says, AsiaÆs markets will have to wait until the US dollar weakens and reflation becomes a phenomenon, for a recovery to take place.

When it comes to picking stocks, Nomura says in a report, investorsÆ frame of reference needs recalibrating. Equity valuations are extremely low and while it is natural to believe that they could return to the dizzying heights of 2007, this way of thinking is not helpful because it will inhibit investors ôfrom making unbiased decisionsö. Growth in 2009 is going to remain ôsubduedö and this deceleration has already been priced into equity prices. This year, investors shall balance ôimproving risk sentiment, given that this appears to have been unfairly priced in Asian equities, and low expectations for growthö.

NomuraÆs Asian stock selection for 2009 combines the philosophy of economist and investor, Benjamin Graham, with a smattering of Greek mythology.

GrahamÆs method contains nearly a dozen points, but Nomura picks out the following as the most important: an earnings yield equal to at least a AAA-rated bond yield; a dividend yield of at least two-thirds the AAA bond yield; a stock price less than two-thirds of net current asset value; and a debt level below the book value.

By applying these criteria, Nomura comes up with three stock categories. The Titans are the landmarks in their respective sectors, with a strong balance sheet, good management, and a strong business model. Then there are the Heroes, who are like the Titans in miniature, offering higher returns with an increase in risk. Below them come the Mortals, which not only face the prospect of their equity price decreasing, but also some potentially terminal problems.

Among the Titans is notebook manufacturer, Acer, NomuraÆs top buy in Taiwan. Despite the expected contraction in PC sales over 2009, the Japanese investment bank thinks that the combination of Acer's tight business model with a wide exposure to the notebook market, which is growing faster than the PC market, will prove to be a winner. Another Titan is SingaporeÆs SingTel, which, with its fingers in two developed markets and seven developing markets, brings a level of diversification that satisfies Nomura. Its low gearing is another plus.

Heroes include Sun Hung Kai Property, which Nomura claims has a track record of going through crises û six in the past 30 years û and emerging stronger every time, and TaiwanÆs Fubon Financial Holding Company, which is also expected to show a heroic performance ôdue to its sound cash position and experience in looking for inorganic growth avenuesö.

The most interesting list is the Mortals. Alibaba.com gets a bearish stamp from Nomura since it is more exposed to the slowdown in exports than any other Chinese internet company. Other mainland losers are: Dongfeng Motor Group, on an expected profit decline in 2009 that could be exacerbated by its ôaggressiveö capacity expansion; and China Southern Airlines, which has the worst yield management in the sector, a dependence on low-end fliers and low level services that will see it ôsuffer most in the down cycleö.
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