Favourite Asian Equity Market for 2009: China           

Despite the huge plunge in the Chinese stock market in 2008, there are several reasons why we feel that the Chinese equity market still has the makings of a winner in 2009.

We think that despite the global demand slowdown, domestic consumption and investments will remain supportive of China’s economic growth in 2009. The Chinese government has already announced a 4 trillion yuan stimulus plan to spur economic expansion, to be utilised by the end of 2010. 45% of the money will be used to build railways, highways, airports and power grids, with 25% used for post-disaster reconstruction and 9.3% for rural development and infrastructure.

Also, the Chinese government could potentially resort to pump priming the economy further to boost consumption in 2009. For example, the government could consider raising the ceiling on tax-free income, expanding health, education subsidies for low-income households and possibly increasing the price ceiling for grain procurement. The positive effects of the stimulus package would likely start to be more visible in the first quarter of 2009 and more obvious in the second half. That should be sufficient for China’s economy to avoid a hard landing in 2009.

As at 13 January 2009, the estimated PE of the HSMLCI index is at 10.1X and 9.0X for 2009 and 2010. It is still much lower than the historical average of 16.5X, since the launch of the index in October 2001 (See Table 1).

Despite the positives, investors of China equities face three major risks. Firstly, there is a huge likelihood that the manufacturing sector in China will experience excess capacity and a slowdown in production alongside a sharp drop in global demand for China’s goods. Also, if the government investment spending plan is not as effective as what many predict and government spending is not able to translate to a corresponding high growth in consumption, it could potentially slow the Chinese economy down. The third key risk is if corporate earnings fall by a higher than expected margin. As of 13 January 2009, our estimated earning growth for the HSMLCI index is 7.8% and 8.0% for 2008 and 2009, revised down from double digits. 2009 will be a tough year ahead for most of the Chinese companies.

Least Favoured Asian Equity Market for 2009: Taiwan

While we like the Chinese equity market, our least favoured Asian equity market also comes from the Greater China region. Here, we explain why Taiwan is our least favourite Asian equity market for 2009.

Plagued by problems related to the sharp slowdown in the technology sector, we think that Taiwan is likely to be the worst performing single-country equity market for 2009. Taiwan’s earnings are estimated to fall 29.9% and 22.2% in 2008 and 2009, which are some of the worst figures among the markets we cover. Due to the downturn in earnings, the estimated PE for 2009 is 15X (as of 13 January 2009). With such valuations, it is the least attractive market within Asia (See Table 1).

Within the Taiwanese market, earnings for the semiconductor sector are estimated to drop 35.5% and 28.6% in 2008 and 2009. The semiconductor sector is highly sensitive to a decline in global demand as the goods produced usually have low profit margins and Taiwan faces strong competition from the China manufacturers. Taiwan is an export-dependent country with exports accounting for 68% of its economy in 2007. From past experience, we expect to see a sharp contraction in exports in 2009, leading to slower economic growth in Taiwan. When Taiwan fell into a recession in 2001, exports contracted 7.8% in 2001 after growing 18.9% in 2000. Exporters are likely to recover only when demand starts to increase. Therefore, we expect that Taiwan is likely to recover only after overall demand for technology exports recover. The Taiwan Dollar only depreciated 1.1% in US Dollar terms in 2008. In 2009, the Taiwan Dollar may depreciate further to reflect a decreasing demand in Taiwanese electronics products.

[Our recommended funds for the Greater China region are First State Regional China and HGIF Chinese Equity. Please also see: FSM's Top Equity Fund Picks '09 at 1% for a promotion on these 2 funds. The promotion is valid from 3 January 2009 to 30 January 2009]