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Markets have been rather turbulent in the past few days, as investors were all tensed up over how a potential recession in the US would affect the global economies. We believe that althought it is quite certain that the US will fall into a recession in the next twelve months, there have been some signs of over-selling in global equity markets currently. This is especially showing in the Asia ex-Japan markets.

The MSCI Asia ex-Japan index, our proxy to assess the health of the Asian equity market at large, was down 12.1% year-to-date, as at 21 January 2008. Overall, China and India, the two Asian markets which were up the most in 2007, corrected by a great deal on a year-to-date basis, as at the same date. The Hang Seng Mainland Composite Index (HSMLCI) was down 23.8%, wiping out close to half of its 48% gain last year in a mere 21 days. The Singapore bourse, represented by the FTSE Straits Times Index (STI), had also lost a total of 17.3% just within the first 21 days of this year, wiping out the index's gains for the entire 2007.

Which are the markets we expect to witness a continued downturn this year? Which are those investors could seek to invest during a correction? Read on for more details.

Market	Index	YTD Returns	2007 Returns
China	HSMLCI	-23.8%	48.0%
Hong Kong	HIS	-21.3%	30.3%
Singapore	FTSE STI	-17.3%	16.6%
India	SENSEX	-17.1%	54.9%
Korea	KOSPI	-16.1%	23.9%
Emerging Markets	MSCI Emerging Markets	-13.5%	27.9%
Japan	Nikkei 225	-13.2%	-11.5%
Europe	DJ Stoxx 50 Index	-12.4%	3.3%
Thailand	SET Index	-12.3%	27.5%
Asia ex-Japan	MSCI Asia ex-Japan	-12.1%	28.5%
Technology	Nasdaq 100	-11.6%	11.3%
Taiwan	TWSE	-10.5%	2.4%
US	S&P 500	-9.8%	-3.0%
Malaysia	KLCI	-4.9%	31.8%

The signal that the US economy will go into a recession is quite clear to us. For starters, the conference board leading indicator index has been indicating a downturn since the mid-June 2007. There are 10 components within the leading indicator index; they include the manufacturer's new orders of consumer goods and materials, stock prices of the 500 common stocks listed in the US markets, money supply, interest rate spread (10-year treasury bond yield less federal funds rate) as well as the index of consumer expectations. This index gives a general indication of where the economy is heading, 3 to 9 months ahead.

The leading indicator index started to see a marginally negative year-on-year growth in November 2006, about 8 months before we saw some of the major write-downs in the banks and negative sentiment filling the hearts of investors in August 2007. However, so far in the first three quarters 2007, we have not really seen a negative US economic growth figure on a quarter-on-quarter basis. We think there was likely healthy growth in consumption in the third quarter of 2007; consumption in the fourth quarter of 2007 was also likely to have remained healthy, due to the seasonal spending nearing the Christmas season. However, the positive consumption sentiment may not continue into the first-half of this year.

Examining the various components of the US economic growth, including personal consumption expenditure, gross private domestic investment, net exports of goods and services and government consumption, we found expect that personal consumption and private domestic investment, among others, are likely to weaken, given the pessimism over the US housing woes. The savings ratio for the average US consumer is also pretty low, at less than 1% since April 2007. Debt-to-income ratio is at 1.323 as at end-September 2007, meaning that, for every dollar of income, an average US citizen has to pay off US$1.323 worth of debt. If prices of homes decline further and the amount required for the monthly repayment of home loans rises, it would definitely not bode well for the consumer sentiment in the US. We think the US economy will be going through a recession and economic growth will likely range from 0% to -0.5% in 2008.

On 22 January, the US Federal Open Market Committee (FOMC) had decided on a 75-basis point cut in Federal funds target rate, even before the actual FOMC meeting scheduled for 30 January. This was the largest cut in a single occasion since 1981. Summing up all the cuts since July 2006, the Fed funds target rate has been lowered by a total of 175 basis points. What this shows is that there are true concerns weighing on the Fed, over a slowdown in the US economy. As such, we expect more downside to the US equity market in the year. Although the US equity market is now valued at attractive levels of 15.2X and 13.6X for 2008 and 2009, we think the potential for further downside still exists.

But all this pessimism is not necessarily bad for our investors. We think at this point in time, some markets appear to be over-sold, and too much pessimism has been priced in.

In 2008, the developing Asian economies are still predicted to grow at a healthy rate of 8.3%, according to estimates by the International Monetary Fund (IMF). Economic growth in these economies are largely propelled by the improvements in domestic consumption, investment interest as well as inter-Asian trade.

Given that economic growth factors remain healthy, and the earnings growth for most Asian markets ranges from 10% to 20% in 2008, we think Asian equity markets appear oversold. The estimated PE for the Asia ex-Japan markets are at 14X and 12.6X respectively for the years 2008 and 2009 ― still lower than the average PE of 14.8X in the past three years. Asia ex-Japan's earnings growth for 2008 and 2009, are forecast to hit 15.9% and 11.5%, also at respectable levels (refer to Table 2). Thus, at current valuation levels, or even lower, we think the Asia ex-Japan markets still pose good opportunities to enter the market, for investors with a time horizon of 2 to 3 years.

Market	Index as at 22-Jan-08	PE 2008	PE 2009	Earnings Growth 2008 (%)	Earnings Growth 2009 (%)
US (S&P 500)	1310.5	15.2	13.6	5.8	11.8
Europe (DJ Stoxx 50)	3201.03	13.0	12.0	6.4	8.6
Japan* (Nikkei 225)	12573.051	16.8	15.5	8.4	8.4
MSCI Emerging Markets	1041.06	12.7	11.5	14.5	10.7
MSCI Asia ex-Japan	508.01	14.0	12.6	15.9	11.5
Singapore (STI)	2866.55	12.5	10.9	11.3	15.0
Hong Kong (HSI)	21757.635	14.4	12.4	12.6	16.4
Taiwan (TWSE)	7581.96	13.9	13.0	17.7	6.5
Korea (KOSPI)	1609.02	10.6	9.7	17.6	8.5
China (HSMLCI)	3941.9	16.4	14.4	20.2	14.1
Malaysia (KLCI)	1354.48	15.1	13.7	13.5	10.9
Thailand (SET)	741.54	7.8	7.3	21.8	7.2
India* (SENSEX)	16729.943	22.7	19.3	17.7	17.4
Nasdaq 100	1795.61	21.4	19.9	18.8	7.7

After the recent sell-down in the global equity markets, we think the Singapore equity market looks over-sold and is now very attractive. The negative sentiment in the local bourse is a stark contrast with the extremely positive economic climate in Singapore. Currently, there are many drivers behind the Singaporean economy, including the rise in consumer spending and investment spending. The labour market has been at very healthy levels, as the unemployment rate has generally been kept at muted levels. The most recent unemployment figure for the third quarter of 2007 is at a low 1.7%. This is expected to keep consumer spending intact.

On investment spending, we have the two integrated resort (IR) projects, the Marina Bay Financial Center (MBFC) as well as petrochemical projects on the Jurong Island, which will ensure the healthy growth of the construction sector. Business and manufacturing investments reached as high as S$17.2 billion in 2007, and as much as S$19 billion of investment monies is slated to flow into the country in 2008, according to the Economic Development Board (EDB). After corporate tax rates were cut by 2% in 2007, more companies have been encouraged to set up shop on local shores.

The Singaporean economy is poised to grow healthily, though exports would be affected if the demand for Singaporean exports from the US were to decline. The good news is: the Singaporean economy has become more diversified at this point in time, compared to about 2 to 3 years ago. The economy's growth focus has been switched to the financial services, biomedical and tourism sectors. Moreover, despite talks about a potential US recession, the Singapore government still estimated that the economy will grow in the range of 4.5% to 6.5% in 2008 ― a decent growth rate, compared to other developed economies.

From Table 2, based on the FTSE STI's index level of 2866.55 at 21 January 2008, the estimated PE for the Singapore bourse is at the lower-end of historical band, at 12.5X and 10.9X for 2008 and 2009 respectively. Earnings growth, on the other hand, looks respectable at 11.3% and 15% for 2008 and 2009 respectively. Table 3 also shows that the earnings yield of the market in 2008 is much higher than the 5-year bond yield for the Singapore market, at 6.5%. This figure is higher than most of the markets that we currently cover, aside from the Thai market. Thus, we think that if a major correction for the global markets is on the cards, the Singapore equity market would definitely be one gem to look out for.

Market	Earnings Yield 2008	5-Year Bond Yield 22-Jan-08	Excess Yield over Bonds
USA	6.6%	2.6%	4.0%
Europe	7.7%	3.8%	3.9%
Japan	6.0%	0.8%	5.2%
MSCI Emerging Markets	7.9%	5.9%	1.9%
MSCI Asia ex-Japan	7.1%	4.2%	3.0%
Singapore	8.0%	1.5%	6.5%
Hong Kong	7.0%	2.2%	4.8%
Taiwan	7.2%	2.3%	4.9%
Korea	9.5%	5.4%	4.0%
China*	6.1%	4.2%	1.9%
Malaysia	6.6%	3.6%	3.0%
Thailand	12.9%	4.0%	8.9%
India	4.4%	7.4%	-3.0%

Other than the Singapore market, other attractively-valued Asian markets include: Singapore, Taiwan, South Korea and Thailand. If investors are looking to adding on to their supplementary portfolios (which typically takes up 10% to 20% of a portfolio) during future corrections, we believe it could potentially be more profitable if they were to pour investment monies into these markets.

We think that the global equity markets will stay volatile in 2008. The sub-prime crisis in the US is likely to cause a slowdown in domestic spending in the US, where consumption growth takes up 70% of the country's total economic growth. Even after the FOMC has cut rates by 100 basis points, as at 21 January 2008, the S&P 500 index has continued to slide by a further 9.8%. The latest surprise rate cut of 75 basis points on 22 January did not also help to pull up the market sentiment in the US, as the market fell by a marginal 0.4%. All returns are in SGD terms.

Asian equity markets, however, were positively spurred by the surprised rate cut, with Hong Kong's Hang Seng Index (HSI) leading the way, returning more than 10% since. While we think that such up and downs in the markets are going to be more common ahead in 2008, we think that there could still be opportunities amidst the volatility. For instance, the valuations for the Asia ex-Japan markets have become more attractive now; and within Asia, markets such as Singapore, Thailand, Taiwan and South Korea now offer more compelling valuations.

Based on our findings, we recommend an 'Underweight' in the US equities and a continued 'Overweight' in the Asia ex-Japan equities. Our recommended Asia ex-Japan equity funds include the United Asia Fund and the Aberdeen Pacific Equity Fund. On Singapore equities, we like the DWS Singapore Equity Fund as well as the DWS Singapore Small/Mid Cap Fund.

Mah Ching Cheng (Research Manager, AFP & Financial Adviser Representative) is part of the Research team at Fundsupermart.com, a division of iFAST Financial Pte Ltd.

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