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October 6, 2010
Top Markets 3Q 10 - SEA markets roar ahead!
by iFAST Research Team
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Stock markets turned in a strong 3rd quarter performance, as investor sentiment improved on the back of stronger-than-expected economic data. Investors have spent much of the year debating and worrying about a double-dip recession as well as spillover effects of the European debt crisis. As fringe European countries successfully tapped debt markets to roll over their liabilities and the US economy posted a 4th consecutive quarter of growth, investor sentiment improved substantially in September, allowing key markets like the US to post its best September performance in 71 years. A check on the top-performing markets on a year-to-date basis (at the end of 3Q 10) shows an unchanged leader board (since end June 2010, see “Top Performing Markets at Half Time: Indonesia the Runaway Leader”), with Indonesia, Thailand and Malaysia retaining the top three positions. An impressive surge by the Thai equity market in 3Q 10 left it neck-and-neck with the Indonesia at the end of the quarter, and investors in both markets will be keenly watching both to see which one will take the “chequered flag” to finish as the top-performing equity market under our coverage at the end of 2010. The Winners: Indonesia, Thailand and Malaysia Indonesia (JCI; +37%) The Indonesian market continued to perform well in 3Q 10, retaining top position – a position it has held since the start of the year. In 3Q 10, the JCI index rose 20.17% (in rupiah term), bringing its year-to-date return to a hefty 38.15%. On year-to-date basis, the rupiah strengthened moderately by 5.0% against the USD. An attractive feature of the Indonesia market is that its economy is largely domestically-driven (domestic demand accounts for 58% of GDP), helped by its huge 237.6 million population base. GDP growth continued to be strong, expanding by 6.2% year-on-year in 2Q 10, beating consensus forecasts of 6% growth, and accelerating from the 5.7% year-on-year growth in 1Q 10. Growth in household consumption (5.0% year-on-year) and private investment (8% year-on-year) were the main drivers behind the strong rise in Indonesia’s GDP. Given Indonesia’s strong economic growth and sound fundamentals, it is very hard for foreign funds (which are driving capital inflows and overweighting Indonesia in their portfolios) not to remain upbeat and positive on the outlook for the Indonesian economy. Valuations for the JCI do not appear cheap, with a forward PE ratio of 17.0X (for 2010), slightly above its historical PE ratio. Nevertheless, valuation should not just be based on corporate earnings for this year, but also based on the corporate earnings expectations for 2011. With estimated earnings growth of 17.4% and an estimated PE of 14.5X in 2011 for JCI, the current market valuation appears undemanding and investors could expect further upside from investing in the Indonesian equity market. With this, we retain our 3.5 star “attractive” rating on the Indonesian equity market. Thailand (SET; +37%) The benchmark Thai equity market surged 22.3% (in THB terms) in the 3rd quarter of 2010, sending Thailand within touching distance of pole position (currently occupied by Indonesia). Thailand’s strong market performance this year has taken many market watchers by surprise, considering the perennial political issues which have weighed on Thai stocks in the past. In May this year, protests in the capital city of Bangkok turned violent, resulting in as many as 60 reported deaths, with 1,700 injured in the process. Foreign investors fled Thai equities in April and May, resulting in net outflows of US$1.94 billion over the two months (to put this figure in perspective, 2009 saw full-year net inflows of just US$1.14 billion). Stock market performance is a function of money flows in the short-run, and foreign investors (who were largely underweight Thai stocks) poured US$1.89 billion back into the Thai stock market in 3Q 10, boosting the performance of Thai stocks. Over the longer term, economic fundamentals should preside over flows, and we have observed little to suggest that the Thai economy is under strain. Economic data has been positive, with rising consumer confidence, strong export growth and stronger-than-expected 2Q 10 GDP growth (9.1% year-on-year, compared to 8% estimated by the consensus). We remain positive on the Thai economy’s outlook, but with the market trading at 11.6X projected 2011 earnings (close to the market’s low-teen historical average multiple), we retain our 3.5 star “attractive” rating on the Thai equity market. Malaysia (KLCI; +20.2%) The FBM KLCI chalked an impressive return of 11.4% (in RM term) in 3Q 10, bringing its year-to-date return to 15.0%. Apart from economic recovery taking hold, the strong performance of KLCI in 3Q 10 was also underpinned by increasing corporate activities and strengthening of the ringgit, which induced foreign fund inflow into the Malaysian capital market. Foreign funds are flowing into Malaysia in anticipation of further appreciation of the ringgit as Bank Negara Malaysia has recently liberalised the currency by allowing it to be used in international trade settlement. Malaysia 2Q GDP growth softened to 8.9% year-on-year after surging by 10.1% in the 1Q 10. Growth is expect to slow down further in 2H 10, moderating into 2011 due to an anticipated slowdown in exports. Malaysia’s exports are expected to slow as exporters are likely to be negatively impacted from the strengthening of the ringgit. Year-to-date, the ringgit has appreciated against USD by 9.8%. Overall, we are still positive on the outlook of FBM KLCI going into 4Q 10 as there are major events domestically that could spur the market further (e.g. Budget 2011 and full details of the Economic Transformation Programme). Valuation for FBM KLCI remains attractive with estimated earnings growth of 25.4% and 14.6% in 2010 and 2011 respectively, translating to estimated PE ratios of 16.0X and 14.2X. As such, we retain our 3.5 star “attractive” rating on the Malaysia equity market. Bringing up the rear: Europe Europe (Stoxx 600; -8.9%) With the Eurozone debt crisis being one of the key market concerns in 2010, it is no surprise that the European stock market has the dubious honour of being at the bottom of the list for two consecutive quarters. However, the European market (as represented by the Stoxx 600) actually posted a strong third quarter, rebounding 6.7% in EUR terms. The euro also strengthened against the USD by 11.4% in the quarter, partially reversing a 14.6% depreciation in the 1H 10, leaving the euro just 4.8% lower against the dollar on a year-to-date basis (as of 30 September 2010). With a joint bailout of Greece in May 2010 along with a 750 billion euro lifeline for troubled Eurozone members, the ECB and IMF managed to avoid a catastrophic collapse in confidence and a systemic breakdown in global financial markets. Also, while Eurozone stress tests have been largely farcical in nature, the PIIGs have still managed to sell debt, albeit at higher rates. With an ebbing of concerns over a potential sovereign default in the Eurozone, investors have turned their attention to the better-than-expected 2Q 10 GDP growth (1% quarter-on-quarter, versus 0.7% growth expected). Exports in the Eurozone have been boosted by the weaker euro, which will ultimately boost revenue (and hence profit) of European exporters. Despite the consensus revising European corporate earnings estimates downwards in September, stocks in the Stoxx 600 are still expected to post earnings growth of 34.9% and 15.6% in 2010 and 2011 respectively, translating to estimated PE ratios of 11.7X and 10.2X (data as of 30 September 2010). At such low valuations, we retain a “very attractive” 4-star rating on the European equity market, despite the knowledge that austerity measures will likely curtail growth in domestic consumption. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||