We updated the earnings and valuations of the various markets and looked in more detail into these various markets to give a clearer picture of what lies behind these aggregate figures. Earnings and valuations are much more important than any one economic indicator for any one single market. This is because while the various economic indicators like leading index, GDP, etc tell us about economy in general, it is forecast earnings growth rates which will drive the market higher. Valuations are also important because all the good news in the world and all the best earnings growth is not enough if all these have already been priced into the market at unreasonably high valuations.

US Market

US is awash with good news currently. The economic data coming in has been good and the economy is expected to grow at 4.6% this year based on the average estimate of the economists surveyed by Blue Chip Economic Indicators. Some potential problems which for now are not yet pressing include the fears of terrorist attacks, the twin deficit in the US and the effects of a depreciating US dollar. The twin deficit is referred to as the simultaneous widening of the federal government's fiscal deficit and the current account deficit.

Now we look at earnings and valuations, firstly, the earnings of the companies of the S&P 500 index suffered a drop starting from the second quarter of 2001. It was only in the 3rd quarter of 2002 that they started to grow again. The growth rates since then has been accelerating. This is also borne out when we look forward into 2004 and 2005. Earnings are forecast to continue growing, by 11% in 2004, and by 8.5% in 2005. In general, this growth is across the board and affects most US companies in a broad spectrum. In the year 2004, only 15 companies expect to be making losses. By 2005, this number is expected to reduced to just 6 companies out of the 500 in the index.

However, all these good news should be balanced against the average valuations for US companies. On average, even with the growth in the earnings, US companies are trading at valuations near to 20 times PE. Even with the forecast growth in earnings, this goes down to 17.4 times forecast PE for the year 2005. This is not very low and indicates that a certain portion of the economic recovery has already been priced in. Furthermore, with the US dollar expected to weaken even further, the potential upside in the market will be further reduced by the currency effect. Thus, we are neutral on the US market and expect it to return around 15% over the next 3 years taking into account the depreciating dollars effect.

Japan Market

*Japan PE forecasts are based on fiscal year ended March 2004, 2005 and 2006 respectively.

At one time last year, it was feared that Japan was going to fall into yet another recession. However, these fears has receded as the economy has rebounded and earnings of the Japanese companies have picked up. While domestic growth remains weak, the earnings of many Japan companies have improved markedly. Japan companies mostly use March year end numbers. We took a sample of the largest 50 companies of the Nikkei 225 index, forming about 70% of the index. 12 companies out of the 50 companies, or 24% of these companies were in the red for the financial year ended March 2002. However, when we look at the forecast earnings of companies for the year ended March 2004, only 2 out of the 50 companies (just 4%) are expected to report losses. Growth is slightly uneven though. Almost half of the companies are expecting to report only single digit earnings growth for the year ending March 2005, and there are some companies with very high projected earnings growth of triple digits which skew the data slightly. It should be noted that although the forecast PE numbers for Japan look high, they have also historically never been low. Japan has traded above 30 times PE for most of the 90s. We remain neutral on Japan. Stock selection in this market is extremely important and we would advise that investors stick with a good fund manager.

Europe Market

Europe is also experiencing better times ahead. The projected average earnings growth for 2004 is 21.1% which is high. However, we note that the number was skewed by a handful of large Europe companies like Diamler Chrysler and Philips Electronics which expect to go from negative into the black in 2004. When we took out some of the most extreme cases skewing the data, we had 9.9% earnings growth for 2004 which is more reflective of the overall market. This growth is expected to pick up in the year 2005. Valuations of the Europe market is quite attractive at this stage. The forecast PE ratio of 15.5 times for 2004 and 13.7 times for 2005 look attractive when compared to the more highly priced market of US and Japan. Also, the Euro continues to appreciate against the US dollar, adding a further boost to investor's returns. Overall, we are more positive on the Europe market vis a vis the US markets (which is why it has a higher star rating than the US market).

Asia Market

*India's financial year end is March meaning that its PE 2003 number refers to the PE for the fiscal year ending 31 March 2003, and similarly, for its other figures as well.

When we look at Asia, we see that this is the region with the most attractive valuations and earnings growth. In absolute terms, Asia is lower than all the other regions in terms of PE. Its projected earnings growth rates for the year 2004 are also the highest. There are some differences within the countries of Asia. The ones expecting the highest earnings growth rates in 2004 include South Korea, China, Taiwan and Singapore. The ones with the lowest PEs are South Korea, Indonesia and Thailand.

We sampled the largest 30 to 50 companies for each market to further analyse the numbers behind the average earnings figure.

OF PARTICULAR NOTE:

Thailand - Earnings growth is strong for many companies (46% and 42% of the companies have earnings growth rates of more than 20% in the year 2004 and 2005 respectively). However, there are also some companies with single digit slow growth that pull down the numbers.

South Korea - Some companies which are expected to go from being loss making into being profitable will boost the earnings figures for 2004. Selected companies which form a large portion of the index like Samsung electronics that are expected to have over 40% earnings growth for 2004 also contribute to the high earnings growth average for 2004.

Taiwan - The semiconductor companies, transportation and computer manufacturers are mostly expecting very strong earnings growth in 2004. Only telecommunications and auto manufacturers are projecting slow growth. Most semiconductor and computer manufacturers are still trading at PE multiples of low teens indicating that valuations are still attractive.

Singapore - 55% of the companies have forecast earnings growth of more than 15% in the year 2004. The forecast average PE of the overall market is also lower than what the market has traded historically before the Asian financial crisis.

China - China petroleum and Petrochina form close to 60% of the Hang Seng Chinese Enterprise index. However, in practise, fund managers never hold these 2 companies in such large proportion. Excluding the earnings of these 2 companies (because they skew the data), China's companies on average are expecting high earnings growth for 2004. Some of the strongest growth is expected in the airline and chemicals sector.

India - One reason that the consensus estimated PE of 20 times is high is because of the high PE reflected for Bharti Teleservices. This company has an estimated PE of 65 times. Once we exclude this estimate from the constituents, the estimated PE will be 19.2 times for the financial year end March 2003. Earnings growth is broadbased and diversified across all sectors.

Overall, Asia is expected to grow strongly in the year 2004, and this growth will continue into 2005, though the rate is expected to slow. Valuations as represented by forecast PE are also still lower than other regions as well as when compared to Asia's historical PE averages. Thus, the upside potential for Asia remains strongest amongst all the various regions. A close look at the numbers behind the average market figures revealed that most of the earnings growth and low valuations is broad based and not the result of one or two companies only. This has allowed us to reaffirm that going forward, Asian markets can be expected to outperform the other regions.