Asia Maxima (Delirium) - 3Q14 20140703

Asia Maxima
Quarterly review and asset allocation

G7 credit-to-GDP gap and asset-to-GDP gap

Note: The gaps measure deviations of the credit and asset to GDP ratios from their long-term trends.
Credit includes lending to the non-financial private sector. Assets are total household assets.
Source: CLSA, BIS, Datastream, CEIC Data, IIF
Find CLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@tor proprietary database at clsa.com
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Christopher Wood
christopher.wood@clsa.com
+852 2600 8516

Joe Man
joe.man@clsa.com
+852 2600 8570

3Q14

Asia
Strategy

Includes:
Asia ex-Japan
thematic equity
portfolio for long-only
absolute-return
investors
Japan thematic equity
portfolio for long-only
absolute-return
investors
Recommended long-
only asset allocation
for US-dollar-based
pension funds

www.clsa.com

Delirium
Extremely low volatility. Financial markets are in a condition of false
euphoria, characterised by extremely low volatility, the result of more
than five years of unconventional monetary policy. The Achilles heel in
the system is exposed by the divergent trend between asset prices and
credit growth in the developed world.
Fed tapering continues. The Federal Reserve continues to taper but the
US economy remains far from robust. A successful exit from quantitative
easing remains as unlikely as ever, though there is growing possibility that
wage pressures in a structurally constrained US labour market could trigger
a tightening scare.
ECBs version of QE. The European Central Bank is likely to have adopted
its own version of quantitative easing before the end of the current
quarter. Investors will be particularly excited if the ECB follows through on
its talk of buying asset-backed securities.
BoJs attempt to end deflation. The coming quarter will be critical for
judging the success of the Bank of Japans attempt to end deflation. For now,
the Japanese central bank believes its policy is working, which would be
positive for the stock market. But if that view is proven wrong by the data,
then another bout of unconventional monetary policy becomes likely, which
would also support the stock market, albeit at the cost of a weaker yen.
Beijings commitment to reform. China remains the main area of systemic
risk in emerging markets, given the massive build-up of debt in recent years,
amid growing evidence of an increasingly porous capital account. But
investors are still advised for now to give Beijing the benefit of the doubt,
given the apparent commitment to reform. The two main areas to monitor
remain the residential property market and capital flows.
Gold insurance. With central banks in the developed world remaining
committed to unconventional monetary policies, the case for gold bullion as
essential insurance remains clear. Gold will be the best asset to own when
investors finally question the efficacy of quantitative easing. This will only
occur when the consensus realises that unorthodox monetary policy does not
lead to healthy sustainable growth but only boom-bust asset-inflation cycles.
Prepared for EV: fsudjono@henanputihrai.com

Asia Maxima

2 christopher.wood@clsa.com 3Q14

Contents
Global and regional overview ............................................................ 3
Asia asset allocation ........................................................................24
Country views
Japan: Inflation stress test ................................................................... 38
Australia: Mining and housing paradox ................................................... 42
China: Conflicting signals ..................................................................... 46
Hong Kong: A degree of tension ............................................................ 50
India: Gujarat model on national stage .................................................. 54
Indonesia: Close election race .............................................................. 58
Korea: Growing pressure to ease .......................................................... 62
Malaysia: More macro than micro .......................................................... 66
Philippines: Macro positives .................................................................. 70
Singapore: Affordability issue ............................................................... 74
Taiwan: Technology driven ................................................................... 78
Thailand: After the coup ...................................................................... 82
Appendix: Tables and charts ............................................................86
All prices quoted herein are as of 30 June 2014
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Section 1: Global and regional overview Asia Maxima

3Q14 christopher.wood@clsa.com 3

Global and regional overview
There have been numerous crises and mini crises in financial markets in
recent decades. But the markets ended the past quarter in a situation where
the dominant sentiment among investors was a growing focus on the lack of
volatility. If moves in the worlds major equity markets have been relatively
subdued, the major area characterised by such a lack of volatility has been
the foreign-exchange market. Here volatility has sunk to record lows. Thus,
JPMorgans Global FX Volatility Index has fallen from a recent high of 11.8 in
mid-2013 to a record low of 5.5 in late June (see following chart). But the
same trend of declining volatility is also clear in the world of stocks and bonds.
JPMorgan Global FX Volatility Index

Source: Bloomberg
One way of interpreting this is that central banks in the developed world have
succeeded in persuading investors that interest rates will stay very low for a
very long time. It is also this confidence in the continuation of low interest
rates which has resulted in the chief feature of current markets. That is a
growing reach for yield as investors buy ever more complex debt securities,
often with leverage, to generate a greater return. This process, which has
been aptly described as a yield bubble, is a direct consequence of more than
five years of zero interest rates and unconventional monetary policy. It can be
chronicled by the continuing revival of risky lending practices, which were
discredited in the financial crisis.
This trend is worth going into in some detail to demonstrate the point since it
is in one sense truly remarkable that the appetite for aggressive debt
structures has rebounded so strongly just six years after such structures were
discredited in the global financial crisis. Yet in another sense, of course, it is
quite logical since this is the behaviour encouraged by unconventional
monetary policy. One obvious example is the surge in high yield issuance,
which is now back above pre-financial crisis levels. Thus, US high-yield
corporate bond issuance has risen from US$43bn in 2008 to a record
US$336bn in 2013 and US$146bn in the first five months of 2014 (see
following chart). But as yields on more conventional subordinated debt have
come down, debt investors have increased their exposure again to structured
products. Consider, for example, collateralised loan obligations (CLOs). CLO
issuance totalled US$82bn in 2013, a mere 15% below its peak level in 2006,
and is forecast to reach US$100bn this year. A further example is the
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A lack of volatility
The reach for yield
The revival of
risky lending



renewed appetite for so-called covenant-lite loans, often coupled with bullet
repayments, where interest is rolled up and not paid to the end of the loan.
Thus, US cov-lite loan volume rose by 41% YoY to US$84bn in the year to
mid-June, according to Dealogic. Meanwhile, US leveraged loan issuance rose
by 68% YoY to a record US$1.1tn in 2013 (see following chart).
US high-yield corporate bond issuance

Note: YTD14 = January-May 2014. Source: SIFMA, Thomson Reuters
US leveraged loan issuance

Source: Bloomberg
These sorts of imprudent lending and investing practices are normally
associated with credit bubbles. But an interesting feature of the Western
world post-financial crisis is that there has not been a credit bubble. Rather,
credit growth has remained subdued in the developed world post-2008, be it
in America, Europe or Japan. US bank loans rose by 4.8% YoY in June,
compared with the pre-crisis average growth rate of 10%, while Japanese
bank loans rose by 2.4% YoY in May. As for the Eurozone, loans to the private
sector declined by 2.0% YoY in May (see following chart). Indeed, this
ongoing subdued credit growth, and related deleveraging dynamic as
reflected in continuing declining velocity, is the reason why central banks
have continued to indulge in unconventional monetary policy as economic
growth has remained subpar. Thus, annualised real GDP growth in America
has averaged only 2.1% between 2Q09 and 1Q14, while in the Eurozone it
has been only 0.7% during the same period (see following chart).
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US, Japan and Eurozone bank loan growth

Source: Federal Reserve, Bank of Japan, ECB
US and Eurozone real GDP growth

Source: Datastream
The resulting paradox is perhaps best highlighted by research done of late by
the Institute of International Finance (see IIF reports: Capital Markets Monitor,
April and May 2014 issues). This research has focused on the divergent trend
since the crisis in the developed world between the credit-to-GDP ratio and
what the IIF describes as the asset-to-GDP ratio, which is defined as
household wealth or assets to nominal GDP. This shows that the asset-to-GDP
ratio has shown a large positive deviation of nine percentage points from its
long-term trend in the G7 world based on IIF data. By contrast the credit-to-
GDP ratio has shown a contrasting trend. The G7 credit-to-GDP ratio, which
includes all lending to the non-financial private sector, has collapsed since the
crisis to eight percentage points below its long-term trend, down from a
positive deviation of over 10 percentage points in mid-2009.
The obvious conclusion from this is that there is a growing risk that asset
prices are becoming increasingly disconnected from the realities of the
underlying economy. A similar chart to the one shown in the IIF report
highlighting the relevant divergent trends is shown below (see following
chart). It should be noted that the data is based on the BISs long-term series
on credit to the private sector and the central banks flow of funds data on
household assets.
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US real GDP growth
The asset-price credit-
growth divergence



G7 credit-to-GDP gap and asset-to-GDP gap

Note: The gaps measure deviations of the credit and assets to GDP ratios from their long-term trends.
Credit includes lending to the non-financial private sector by domestic banks and non-bank, as well as
non-residents. Assets are total household assets. Source: CLSA, BIS, Datastream, CEIC Data, IIF
The above is interesting because it provides a conceptual framework to help
understand what is going on in a world of quantitative easing where it has
become increasingly evident in recent years that the rich or asset owners
have been the chief beneficiaries of such unorthodox monetary policies. Thus,
in the world of equities, multiple expansion not earnings has been the chief
driver of equity gains in America and Europe in recent years, whereas wages
have remained subdued. On this point, price-earnings ratio expansion
contributed to an estimated 75% of the gains in the US stock market last
year and 43% so far in 2014, and accounted for all the gains in Europe in
both 2013 and 1H14 (see following chart). By contrast, US average hourly
earnings rose by only 2.1% YoY in May, while Eurozone hourly wages rose by
just 1.5% YoY in 1Q14 (see following chart). Similarly, in the world of fixed-
income capital gains and related yield compression have been driven by the
leverage employed in carry trades, leverage only available in a post-financial
crisis world to the affluent.
MSCI USA and Europe: 2013 and 2014 performance attribution

Note: Price performance in local currency terms. Source: MSCI, Datastream, CLSA evaluator
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USA 2013 Europe 2013 USA 1H14 Europe 1H14
PE contribution EPS contribution Price change (%)
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Multiple expansion driver



US and Eurozone hourly wage growth

Source: CLSA
If asset prices are increasingly disconnected from economic reality, this
situation can only be addressed either by developed economies achieving a
more healthy recovery or by asset prices correcting. Yet, the risk is that if
Western economies show signs of an accelerating recovery, market-driven
interest rates will rise sharply, hurting leveraged investors in credit, while
the higher cost of servicing debt will threaten the recovery. Yet, if economies
do not sustain a growth rate acceptable to modern central bankers, then they
will continue with their unconventional monetary policies so further
encouraging asset bubbles.
This is the dilemma the central bankers have created by their now orthodox
unorthodox monetary policies and it remains far from evident to this writer
that there is a painless way out, as argued here in many preceding Asia
Maxima quarterlies. Yet, investors have also to operate in the context of the
official narrative of the market consensus, and this is that the Fed is tapering
this year with a view to normalising monetary policy sometime in 2015 by
raising interest rates for the first time since June 2006.
If this is the consensus expectation, it remains the case that the Fed at its
June FOMC meeting lowered its forecast for real GDP growth for the fifth year
in succession since this lukewarm recovery began in 2009. Thus, the Fed now
estimates 2014 economic growth at 2.1-2.3%, down from the March
projection of 2.8-3%. This would keep American real GDP growth in the same
2-2.5% range it has running at since the recovery began.
Such a continuing level of subpar growth will not incline an extreme dove like
Fed Chairwoman Janet Yellen to want to start raising rates. Indeed, dovish
comments by Yellen during the past quarter caused expectations of the first
Fed rate hike to be pushed back by about three to six months to 4Q15,
though expectations have of late been brought forward again to 3Q15. It is
also highly unlikely that Yellen would have begun tapering this year, given the
relatively soft data, if former chairman Ben Bernanke had not already
launched the tapering process at his second-last Fed meeting in December.
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(% YoY) US average hourly earnings growth
Eurozone hourly wage & salaries growth
The consensus view
The Fed lowers
growth forecast



Still, if Yellen has a doveish bias, it is also the case that history shows that
there is a well-established tendency for financial markets to test a new Fed
chairman in the first few months in office. Given the almost eerie sense of calm,
if not complacency, hanging over markets as reflected in record low volatility
measures, the suspicion is rising that such a test may be approaching.
Catalysts for market-driven scares are, by their nature, almost impossible to
predict with recent newsflow from the Middle East a reminder that geopolitical
events can always trigger shocks in terms of, say, a spike in the oil price.
Such an oil price spike to, say US$120/bbl and higher, would likely trigger an
inflation scare in markets, even though its impact would ultimately be
deflationary. Still there is one area where a market driven inflation scare is
becoming increasingly plausible even if it is in the continuing context of the
secular deleveraging trend still engulfing the Western world. That is if there is
suddenly evidence that wage increases are finally getting traction in the USA.
Brent crude oil price

Source: Bloomberg
The point to note here is that such a tightening in the US labour market is
possible, if not probable, if Americas declining labour-force participation ratio
is structural, not cyclical. This declining participation rate has attracted
growing focus in recent years with more unemployed Americans leaving the
workforce than found a job in 48 out of the past 49 months (see following
chart). It has also become the subject of a lively debate among economists
about whether this phenomenon is cyclical or structural. Yellen, an academic
economist specialising in the labour market, remains firmly of the view that it
is cyclical and has reiterated as much of late. Yet, many others, including this
writer, are more persuaded by the argument that it is structural as America
has entered the European dynamic, where rising government benefits reduce
the incentive to work at the lower end of the labour market.
If this sounds a dry academic subject, it has become critically important for
markets. For if the declining participation rate is indeed structural, then there
is less slack in the labour market than the Fed currently believes, which
means, more than five years into an economic recovery in America, that
sooner or later wages should get traction.
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A test for Yellen?
Americas
declining labour force
participation ratio



Unemployed Americans who found jobs or leaving the labour force

Note: Data measures the labour force status flows from "unemployed" to "employed" or from
"unemployed" to "not in labour force". Source: Bureau of Labour Statistics
While this traction is not yet really visible from the all-important average
hourly earnings growth data, such evidence should be forthcoming in the not
too distant future if the structural argument is correct. If so, it could have
significant market impact in the context of ultra-low volatility, where leverage
has been piled on in the world of credit in the pursuit of yield. Sudden
evidence of wage pressures in America would certainly trigger a hue and cry
that Mrs Yellen has been wrong in her analysis of the labour market and that
the Fed is behind the curve. Monetary tightening expectations would come
forward sharply in time, the US dollar would rally and there would be a real
risk of a repeat or worse of last years so-called tapering scare hitting, this
time, not only emerging-market debt, but also all other credit instruments
where investors have put on the carry.
US bond market average daily trading volume

Note: Data up to May 2014. Source: SIFMA
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The pursuit of yield



Such an unwind would also be aggravated significantly, as was certainly the
case in last years tapering scare, by the fact that, as a result of post financial
crisis regulatory initiatives, the sell side does not have anything like the
same inventory of debt securities to make a market. This can be seen in the
somewhat ironic situation that while debt issuance has been exploding, most
particularly issuance of low credit quality debt, secondary market trading
volume in debt instruments has declined significantly - just as has also been
the case in the foreign exchange market.
Thus, US bond market average daily trading volume, including Treasuries,
agency securities and corporate bonds, has fallen from US$894bn in 2010 to
US$721bn in the first five months of 2014 (see previous chart). While
average daily currency trading volume on the ICAP-owned EBS platform, one
of the main venues for the global FX market, declined by 42% YoY to
US$73.5bn in May (see following chart).
Average daily FX trading volume on the EBS platform

Source: ICAP
US pending home sales index and total existing home sales

Source: CLSA, National Association of Realtors
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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
US total existing home sales (LHS)
US pending home sales index (2-mth lead)
(m units, saar) (sea adj)
The sell sides
lack of inventory
Declining trading volumes



There is, therefore, scope for significant market dislocation which would feed,
via fixed income, into the world of equities if investors started to discount
nearer term Fed tightening. Still, this does not mean that such a sign of rising
wage pressures in the USA would signal the sudden transition from a
deflationary era to an inflationary one. For an interest-rate hike at the short
end, or even the perception that monetary tightening is coming much sooner
than previously expected, and any resulting related back up in long-term
interest rates, is likely to prove deflationary, in the sense that an economy
like Americas with continuing high debt levels, will prove ultra-sensitive to
the impact of higher interest rates, as was demonstrated last year in terms of
the US housing markets stalling in the face of higher mortgage rates (see
previous chart).
Indeed the housing market has not really revived since then, despite the
decline in mortgage rates seen in the first half of this year as a
consequence of the Treasury bond rally. In this respect, it has become
increasingly evident that the rapid recovery seen in US housing in 2011
and 2012 was driven primarily by investors not end users, as those with
capital to deploy arbitraged the spread between low financing costs and
high rental yields.
The same financing dynamic has been behind the significant rise in US
corporate debt post the financial crisis, as corporates have used the cheap
funding costs available to finance share buyback programmes to boost their
return on equity, the formula against which many executives continue to be
compensated. Thus, S&P500 share buybacks surged by 23% QoQ and 59%
YoY to US$159bn in 1Q14, the highest level since 3Q07 when buyback activity
peaked at US$172bn (see following chart).
S&P500 share buybacks

Source: Standard & Poor's

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Surging US
share buybacks



The consequence of the above is that any monetary tightening scare, or
related inflation scare, is likely to prove short lived. In this sense, evidence
of rising wages pressures, if such a development occurs, will likely turn out to
be late cycle confirmation that the US economic recovery, which began in
2009, is nearing its end, not its beginning.
And, in such a macroeconomic context a dove like Yellen will want to
accelerate quantitative easing, not end it. That is unless there starts to be
more vocal opposition from within the Fed, from Congress and from the
executive arm of the federal government to what by now should be seen as
the obvious negative consequences of what has been aptly described by
CLSAs Australian bank analyst Brian Johnson as QE-ternity. See the
Australian country section on page 42.
Still, if this would be a development to applaud, it also remains unlikely. Much
more likely is that the policy-making establishment in such a context will look
to expand quantitative easing with the result that the distinction between
monetary policy and fiscal policy will become ever more blurred. For, with the
Fed already owning 22% of outstanding Treasury bonds and buying over 70%
of net Treasury debt issuance since the beginning of 2013 (see following
chart), without seemingly nasty inflationary ramifications, QE advocates in a
continuing low growth world will increasingly be tempted to argue that central
banks should buy all government debt and simply cancel it. Indeed, such
arguments can already be heard in some quarters.
Fed buying of US Treasuries and increase in Treasury debt outstanding

Note: Fed buying data up to 18 June, Treasury debt outstanding data up to May 2014. Source: Federal
Reserve, SIFMA, CLSA
Meanwhile, as the market consensus for now focuses on continuing tapering
and normalisation of US monetary policy next year, ECB boss Mario Draghi
has spent most of 2014 preparing the way for quantitative easing in the
Eurozone, as he has increasingly drawn attention to falling inflation pressures
in the Eurozone. On this point, Eurozone CPI inflation fell from 0.7% YoY in
April to 0.5% YoY in May, the lowest inflation rate since November 2009 (see
following chart).
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(US$bn)
Fed buying of US Treasuries
Increase in Treasury debt outstanding
QE-ternity
Draghis QE preparation



Eurozone CPI inflation

Source: Eurostat
In the June ECB meeting, Draghi announced a series of measures, including
negative interest rates (see following chart) and a new version of the LTRO
known as targeted longer-term refinancing operations or TLTROs, which
amount to going as far in the direction of quantitative easing as possible
without actually doing it. This probably sets up the ECB for a formal move to
quantitative easing by the end of the third quarter, with Draghi whetting risk-
seeking investors appetite with his announcement in June that the ECB has
decided to intensify preparatory work related to its proposed outright
purchases of asset-backed securities where the debt securitised could be
Eurozone SME debt.
ECB key policy interest rates

Source: ECB
The above pending development clearly marks the exact opposite of the
anticipated normalisation of monetary policy in America. Still Draghi has been
building the case carefully for more unorthodox monetary policy initiatives in
the Eurozone because of his awareness of German sensitivities. Still, having
successfully floated the QE balloon and not been visibly shot down by
opposition in Germany, he is now preparing to launch it with the rational
acceptable to Berlin being that inflation threatens to decline to well below the
ECBs formal target of 2%.
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(%)
Marginal lending facility
Main refinancing operations
Deposit facility
The ECB buying asset-
backed securities?



Eurozone and PIIGS current account balance

Note: PIIGS = Portugal, Italy, Ireland, Greece and Spain. Source: ECB, Datastream, CLSA
In the meantime, it is also the case that the deflationary pressures are the
natural consequence of the Eurozones decision, led by Germany, to
implement a macroeconomic adjustment within the context of a fixed
exchange-rate system, where the adjustment is made by a decline in internal
costs and a restoration of internal competitiveness. This process at work can
be seen in the Eurozones still rising current account surplus (see previous
chart), primarily triggered by weakening domestic demand, and the related
resilience of the euro as well as the dramatic collapse in periphery bond yields,
which now appear to be in the process of converging with German bund yields.
Thus, the Spanish 10-year bond yield declined below the 10-year US Treasury
bond yield last quarter, with the yield spread falling to a negative 3bp on 9
June and was only a positive 13bp at the end of 2Q14 (see following chart).
As for the spread with the 10-year German bund yield, it was only 142bp at
the end of last quarter, down from a peak of 639bp in July 2012.
Spanish 10-year government bond yield spreads

Source: CLSA, Bloomberg
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Eurozone current account PIIGS current account
(bn, annualised)
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(bp) Spread over 10Y US Treasury bond yield
Spread over 10Y German bund yield
Converging Eurozone
bond yields



So Draghi is now trying to mitigate this adjustment process with his own
reflationary initiatives. But the political realities mean he has to engage in
continued double talk. Thus, Draghi still described inflation expectations as
being firmly anchored at the June meeting, while the ECB officially forecasts
headline inflation to be 1.1% in 2015, even though it has just lowered its
2014 forecast from 1.1% to 0.7%. But such conflicting signals should be
ignored, since the reality is that monetary policy in the Eurozone is likely to
become ever more unconventional.
Meanwhile, in another major economy already committed to the worlds most
aggressive quantitative-easing policy, namely Japan, there has been relative
conservatism displayed by the Bank of Japan (BoJ) in terms of a failure to
launch new unorthodox monetary policy initiatives during the first half of this
year. This reflects the fact that the Japanese central bank hopes that a further
expansion of monetisation will not be necessary, given the massive BoJ
balance-sheet expansion that has already taken place. The Bank of Japans
total assets have increased by 92tn or 56% since Governor Haruhiko Kuroda
launched the aggressive quantitative easing programme back in early April
2013 to 257tn or 53% of GDP on 20 June (see following chart).
Bank of Japan total assets as a percentage of nominal GDP

Source: CLSA, Bank of Japan, CEIC Data
The acid test for Japan will come in the coming quarter. There will be two
areas to focus on. The first is whether the economy proves resilient to the
impact of the sales-tax increase at the start of April. The official BoJ view is
that the economy will recover in 3Q after an annualised 4% QoQ decline in
the second quarter caused by the sales tax hike. The second point is whether
inflation starts to decline again once the impact of last years yen devaluation
falls out of the data on a year-on-year basis, as it will do from May on. In this
respect, while the BoJ focuses on core CPI in terms of its formal target, the
critical inflation data point to monitor is so-called core-core CPI, which
excludes both food and energy. This is because core CPI includes energy,
which has been distorted by higher imported energy bills as a result of the
continuing shut down of Japans 48 nuclear plants.
True, nationwide core-core CPI inflation, adjusted for the sales tax hike effect
by the methodology proposed by the BoJ, slowed from 0.8% YoY in April to
0.5% YoY in May. But, more encouragingly, Tokyos adjusted core-core
15
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(% GDP)
Japans coming acid test
The BoJ stance
Japanese inflation data



inflation picked up from 0.4% YoY in May to 0.5% YoY in June, after slowing
from 0.6% YoY in April (see following chart). If core-core CPI inflation can
remain at around current levels for the next six months, that will encourage
expectations that Japan is finally emerging out of deflation.
Japan and Tokyo core-core CPI inflation (adjusted for sales tax hike effect)

Note: Adjusted for the sales tax hike effect by the methodology proposed by the Bank of Japan. Source:
CLSA, Bank of Japan, Statistics Bureau
This is not as unlikely as might be imagined as evidence continues to mount
that Japans labour market is tightening as a consequence of natural
demographic pressures, amid growing focus on labour shortages, not only in
the construction sector, but also in growing number of service sectors. Thus,
the working-age population has been declining for the past 19 years while, for
related reasons, the working-age female participation rate had its biggest
increase on record last year. The working-age population has fallen by 9.1m
or 10% from 87.26m or 69.5% of the total population in 1995 to 78.15m or
61.5% of the total in June (see following chart). Meanwhile, the female
working-age labour participation rate rose by 1.6ppts in 2013 to 65%, the
biggest annual increase since the data series began in 1968 (see following
chart). This compares with 67.2% in the USA and 72% in the UK. If such
pressures continue, it is entirely possible that Japans female participation
rate could end up higher than in any other developed economy.
Japan working-age (15-64) population

Source: Japan Statistics Bureau
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(% YoY) Japan core-core CPI inflation (excl. food & energy)
Tokyo core-core CPI inflation (excl. food & energy)
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Working age (15-64) population (LHS)
Working age as % of total population
(m) (%)
Japans tightening
labour market



Japan, US and UK working-age (15-64) female labour participation rate

Source: CLSA, Japan Statistics Bureau, US Bureau of Labour Statistics, UK Office for National Statistics
Meanwhile, if inflation does surprise by staying positive in Japan in coming
months, it will present a problem of success for the Bank of Japan, in that
it will need to start to send the appropriate market signal by allowing the
yield curve to steepen gradually. But for now, BoJ buying has continued to
keep the 10-year JGB yield at around the 60bp level, a central bank buying
operation that has allowed growing selling of JGBs by domestic
institutional investors. Thus, Japanese city banks holdings of JGBs have
fallen by 34.3tn or 32% since the end of March 2013 (see following
chart). While Japanese life insurers and public pensions sold a net 1tn
and 1.85tn worth of JGBs in 1Q14, according to the BoJs latest flow of
funds data (see following chart).
Japanese city banks' holdings of JGBs

Source: Bank of Japan
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(%) Japan US UK
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100
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120
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(tn)
The BoJs JGB
management



Net buying of JGBs by Japanese life insurers and public pensions

Source: Bank of Japan Flow of Funds Accounts
If the debate as regards the developed economies remains, from a financial-
market perspective, dominated by the ebb and flow of initiatives in monetary
policy, the dominant focus in the world of emerging markets remains on the
structural challenges facing China as it continues to try to rebalance the
growth model away from investment to consumption in what is described by
PRC officialdom as a process of careful deleveraging.
There is certainly a clear understanding among officials that implementation
of structural reform requires a willingness to tolerate slower growth. This is
why the central government has spent most of the year trying to resist calls
for aggressive stimulus in the face of slowing growth, a deceleration better
reflected in nominal GDP data than real GDP data. Thus, nominal GDP growth
has slowed from 18.5% YoY in 3Q11 to 7.9% YoY in 1Q14 (see following
chart). This reluctance to stimulate is despite a number of fine tuning easing
measures announced in the past quarter, in terms of the acceleration of some
infrastructure projects and the tweaking of reserve requirement ratios for
smaller banks.
China nominal and real GDP growth

Source: CEIC Data
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(tn)
Life insurers Public pensions
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(% YoY) Nominal GDP growth Real GDP growth (RHS) (% YoY)
China focus
Resisting stimulus



China urban employment

Source: CEIC Data
If one reason the authorities have so far been willing to resist aggressive
stimulus is the reform agenda, the other is the more practical issue that so
far there remains little evidence, if any, of strains in the labour market. In this
respect, perhaps the most positive point about China today, amid the
continuing focus among investors on the structural problems concerning SOEs,
local-government debt and related problems in the banking sector, is that
based on official data the private sector already accounts for about 80% of
urban employment and that at least 90% of new job generation is currently
generated by the private sector (see previous chart). It is also estimated that
13m jobs were generated in 2013, well above the official target of 10m.
In this context, it is clear that reform-orientated officials understand the
importance of improving the operating environment for the private sector by
reducing tax and regulatory burdens. On a related point, it is also the case
that job generation can expand dramatically if a private-sector dominated
services sector is allowed to flourish in urban areas, most particularly given
Chinas dramatic economies of scale. Indeed, Chinas private sector-driven e-
commerce boom is already a good example of this dynamic at work.
These positives are worth remembering. Still there is no doubt that there are
some minefields to step through in coming quarters, given the looming overhang
of maturing trust products discussed at some length here last quarter (see Asia
Maxima - Financial osmosis, 2Q14). The hope is that the authorities will
introduce some discipline into the system, in terms of imposing some losses on
investors, without precipitating a full scale panic. Still, it is also possible that the
maturing trust products are simply moved from retail hands to institutional
owners, thereby, simply yet again, deferring a problem.
The reality remains then that China is engaged in a delicate balancing act
between encouraging a more market-driven private-sector orientated economy
which can generate job growth, while maintaining all important social stability. In
the meantime, the two key critical variables for investors to monitor as regards
China remain the residential property market, where the authorities are for now
at least allowing a market-driven slowdown, and capital flows.
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State-controlled urban employment
Private urban employment
Chinas delicate
balancing act



China average new home price growth in four tier-one cities

Note: Average of new home price growth in Beijing, Shanghai, Shenzhen and Guangzhou. Source:
National Bureau of Statistics
For now, while the property market is weakening and while there is some
evidence of moderate capital outflows last quarter, the evidence on both
fronts is not yet a cause for alarm. In the case of residential property, last
year saw big price gains in tier-one cities so there is a base effect to
incorporate into the data. New home prices in four tier-one cities fell by an
average 0.1% MoM in May, the first month-on-month decline in two years.
While on a year-on-year basis, new home-price growth in tier-one cities
slowed to 9.9% YoY in May, down from 21.2% YoY in November 2013 (see
previous chart).
As for capital flows, there was some initial evidence of renewed outflows last
quarter, albeit not dramatic. Estimated hot money flows, measured as the
change in financial institutions positions for forex purchases less the trade
balance and net FDI, fell to an outflow of Rmb15bn in April and Rmb204bn in
May, compared with a Rmb118bn inflow in March (see following chart).
China hot money flow estimate

Note: Estimated hot money flow = Change in financial institutions' positions for forex purchases - trade
balance - utilised FDI + Outward direct investment. Source: CLSA, CEIC Data, PBOC
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(1.0)
(0.5)
0.0
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3.0
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1
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1
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1
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1
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1
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1
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1
4
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1
4
M
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1
4
A
p
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1
4
M
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1
4
(% MoM)
New home price average
New home price average (RHS)
(% YoY)
(600)
(400)
(200)
0
200
400
600
J
a
n

0
7
M
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0
7
S
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0
7
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1
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1
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1
3
J
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1
4
M
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1
4
(Rmbbn)
Chinas property market
Capital flows



Renminbi/US$ spot rate (inverted scale)

Source: Bloomberg, China Foreign Exchange Trade System (CFETS)
This trend will probably have been welcomed by the PBOC since the large hot
money inflows seen in preceding quarters were seemingly driven by a desire
to invest in high yielding renminbi-denominated wealth-management
products. Indeed the desire to send a signal that this carry trade was not
without risk was one reason why the PBOC engineered a depreciation of the
renminbi in March by widening the daily trading band from 1% to 2%. As a
consequence, the renminbi depreciated by 3.5% against the US dollar from
its high reached in mid-January to a recent low reached at the end of April
(see previous chart). But here again the PBOC is engaged in its own delicate
balancing act since it will not want to see large capital outflows, which would
lead to a contraction of liquidity, putting pressure on it to engage in more
aggressive easing. That would counter its strategic goal to bring credit growth
back more in line with nominal GDP growth, as was the case between 2003
and 2008 before the massive post-Lehman stimulus.
In this respect, there remains a continuing focus among investors on the
volatile monthly bank lending and social financing data in China. The point to
note is that, when looked at from an annualised basis, the trend is clearly
slowing. Thus, renminbi bank-loan growth has slowed from 16.3% YoY in
September 2012 to 13.9% YoY in May, while the growth in social financing
outstanding has slowed from 22.7% YoY in April 2013 to 16.3% YoY in May.
Still if this is arguably evidence of careful deleveraging, it is also the case
that nominal GDP growth is also slowing, which means that the gap between
credit growth and nominal GDP growth is not really contracting as much as
would be hoped for the overall health of the system. Thus, renminbi bank-
loan growth and the growth in social financing outstanding, are now still
6ppts and 8.4ppts above nominal GDP growth of 7.9%, down from a recent
high of 7.8ppts and 13ppts reached in September 2012 and April 2013,
respectively, (see following chart).
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6
7.8
8.0
8.2
8.4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
The PBOCs balancing act
Chinas slowing
credit growth



China credit growth vs nominal GDP growth

Note: Outstanding social financing estimated as the sum of reported renminbi bank loans outstanding
and the cumulative total since 2002 of all other social financing components. Source: CLSA, CEIC
Data, PBOC
Meanwhile, there is a complicating issue as regards the massive explosion in
credit in China in the years following the Lehman crisis, most particularly if
measured by the social-financing data series, which is the nearest thing in
China to a broad credit aggregate. On this point, annual social financing
volume surged from Rmb6.98tn in 2008 to a record Rmb17.3tn in 2013 (see
following chart). Still, it is important to note that the estimates are that
between one third to one half of the new lending incorporated in this social
financing data comprise maturing loans being refinanced, most particularly
loans made to local government financing vehicles, which were the chief
recipients of Chinas 2009 post-Lehman Rmb4tn panic stimulus.
China annual social financing volume and increase in nominal GDP

Note: YTD14 = January-May 2014 for social financing and 1Q14 for GDP. Source: CEIC Data, PBOC, CLSA
0
5
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(% YoY) Renminbi bank loan growth
Outstanding social financing growth
Nominal GDP growth
0
2
4
6
8
10
12
14
16
18
20
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD14
(Rmbtn) Annual total social financing volume
Annual increase in nominal GDP
The nature of
social financing



There are two ways to look at this phenomenon, one positive and one
negative. The positive point is that the money lent has not been speculated
away since it has gone into infrastructure, which will have some form of
public utility, even if it may not be currently generating an adequate cash flow
to service the debt, while at the end of the day local governments operate on
the same balance sheet as the central government thereby reducing
significantly the potential for a systemic crisis.
The negative point, of course, is that constantly rolling over the same loans is
a negative drag on the economy, which is why it is logical that velocity has
been declining ever since that 2009 post-Lehman stimulus. Thus, Chinas
money velocity, measured as the nominal GDP to M2 ratio, has fallen from
0.68x in late 2008 to an estimated 0.49x in May (see following chart).
China velocity of money (Nominal GDP/M2)

Source: CLSA, CEIC Data, PBOC
So, as ever with China, the story remains more nuanced than is suggested by
the extreme bullish or bearish stances of many commentators. Meanwhile the
positive point is that for now China, and the other emerging markets, have
avoided the temptation to succumb to the allure of quantitative easing with
their own monetary policies remaining orthodox.
0.48
0.50
0.52
0.54
0.56
0.58
0.60
0.62
0.64
0.66
0.68
0.70
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)

Section 2: Asia asset allocation Asia Maxima


Asia asset allocation
There was a return to a more risk on mood last quarter. Asia and emerging
markets were the best performers. The MSCI AC Asia Pacific ex-Japan Index
rose by 5% in US-dollar terms last quarter, while the MSCI Emerging Markets
Index rose by 5.6%. By contrast, the MSCI Europe Index rose by only 1.9%
in US-dollar terms last quarter. This compared with a 4.7% gain in the
S&P500 and, more positively, a 6.7% gain in Japans Topix in US-dollar terms.
Overall, the MSCI AC World Index rose by 4.3% in 2Q14.
This performance raises the hope that the three-year period of emerging-
market underperformance may have come to an end, though Asia and
emerging markets are still slightly underperforming the S&P500 year to date
and are performing almost in line with the MSCI AC World Index. The MSCI AC
Asia Pacific ex-Japan Index and the MSCI Emerging Markets Index have risen
by 5.5% and 4.8% respectively in US-dollar terms year to date, compared with
a 6.1% gain in the S&P500 and a 4.9% gain in the MSCI AC World Index.
CLSA Asia-Pacific universe market valuations
PE
(x)
Earnings
growth (%)
PB
(x)
Div yield
(%)
ROE
(%)
Net gearing
(%)
14CL 15CL 14CL 15CL 14CL 15CL 14CL 15CL 14CL 15CL 14CL 15CL
AsiaPac ex-Japan 12.2 11.0 7.0 10.0 1.5 1.4 3.5 3.7 13.5 13.5 26.6 21.9
Japan 13.5 12.2 17.4 11.1 1.3 0.3 1.9 2.0 10.2 10.4 35.4 29.7
Australia 13.9 13.5 9.1 3.1 1.9 1.8 4.7 5.0 14.5 14.1 40.4 38.3
China 8.7 7.8 7.7 10.5 1.3 1.1 3.9 4.2 15.8 15.5 34.7 30.1
Hong Kong 12.9 12.5 6.6 3.4 1.2 1.1 4.2 4.0 10.6 9.3 16.2 14.1
India 16.8 14.3 13.4 17.4 2.5 2.2 1.5 1.7 17.4 17.8 46.1 37.7
Indonesia 14.5 12.9 11.0 12.4 2.8 2.5 2.5 2.8 21.1 20.6 21.7 16.4
Korea 9.9 8.3 9.5 20.3 1.0 0.9 1.3 1.6 11.0 12.0 15.0 7.8
Malaysia 16.9 15.4 6.8 9.6 2.2 2.0 3.0 3.2 14.0 14.2 19.7 15.8
Philippines 18.9 16.5 4.6 14.8 2.5 2.3 2.3 2.4 14.0 14.7 50.0 47.2
Singapore 14.0 12.8 (1.5) 9.5 1.4 1.3 3.4 3.6 10.3 10.6 34.3 35.1
Taiwan 14.7 13.3 19.8 11.0 2.0 1.8 3.5 3.9 14.1 14.4 (1.9) (8.3)
Thailand 13.1 11.4 5.9 15.4 2.0 1.8 3.4 3.8 15.9 16.7 53.6 43.2
Note: Based on CLSA universe of companies under coverage. Calendarised valuations in local currency terms. Source: CLSA evalu@tor
Still the continuing risk of more of a Fed normalisation scare, combined with
the structural headwinds still facing China, mean that it continues to be
risky to recommend an aggressive Overweight for Asia and emerging
markets on a benchmark-related basis. But a Neutral position remains
certainly justified, as was formally recommended here last quarter. The
relative valuation case for Asia remains compelling, given that most of the
gains in America and Europe last year were driven by multiple expansion.
The best guide to valuation remains the trailing PB ratio. Trailing valuations
remain below the mean of the past 19 years. The MSCI AC Asia Pacific ex-
Japans trailing PB is now 1.66x, compared with a mean of 1.83x over the
past 19 years (see following chart). Similarly, the index is now trading at
13.1x trailing PE, based on companies with positive earnings. This compares
with a trailing mean valuation of 14x since 1995. On a forward-earnings
basis, CLSAs universe of 868 Asia Pacific ex-Japan companies under
coverage is now trading at 12.2x 14CL earnings, with a forecast ROE of
13.5%. This is based on 7% forecast earnings growth for 2014.
Return to risk on
Still Neutral
emerging markets
Asias valuations



MSCI AC Asia Pacific ex-Japan trailing PB

Source: Bloomberg
Asia also continues to offer a certain defensive quality in terms of still-
significant dividend support, even allowing for the cyclicality of some
dividends. The CLSA Asia Pacific ex-Japan universe has a projected healthy
2014 dividend-payout ratio of 42%. A total of 49% of the stocks in the
universe have a forecast 2014 dividend yield higher than the US 10-year
Treasury bond yield of 2.53%, and 36% have a forecast dividend yield higher
than their local 10-year government-bond yields (see following table). This is
impressive. It is also important in a world of continuing zero-interest-rate
regimes where investors have become increasingly focused on dividends as a
driver of long-term equity outperformance.
Stocks covered by CLSA that yield more than local and US government bonds
10Y local
govt bond
yield (%)
Stocks
covered
14CL yield
>local 10Y
govt bond
As % of
total
14CL yield
>US 10Y
T-bond
As % of
total
Australia 3.5 140 83 59 110 79
China 4.1 128 32 25 66 52
Hong Kong 2.0 75 52 69 44 59
India 8.7 108 0 0 18 17
Indonesia 8.2 58 0 0 16 28
Korea 3.2 89 5 6 13 15
Malaysia 4.0 47 10 21 27 57
Philippines 4.2 44 5 11 12 27
Singapore 2.3 47 33 70 30 64
Taiwan 1.6 87 76 87 66 76
Thailand 3.8 45 19 42 27 60
Total - 868 315 36 429 49
Note: Based on stocks covered in the CLSA evalu@tor database. Source: CLSA
Japan has remained the odd man out in the Asian context in the past 20 years
as it has mostly remained in deflation. Still, the positive point is that its equity
valuations have long since discounted the long-term deflationary trend. This
makes it an attractive market if investors start to hope, as for now is the case,
that deflation can end. The markets better performance last quarter reflected
renewed confidence that deflation could be ending following foreign investors
disappointment in 1Q14 that more aggressive monetary easing had not been
forthcoming ahead of the sales tax increase. Meanwhile, the Topix dividend
yield is still 125bp above the 10-year JGB yield of 0.57%. The Topix is also
trading at only 1.23x trailing book, compared with a long-term average since
1993 of 1.64x (see following chart).
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
(x)
mean
-1sd
+1sd
Asias dividend support
Japan valuation



Topix trailing PB

Source: Bloomberg
The MSCI Japan is also trading at 14x trailing PE, based on companies with
positive earnings, versus an average of 26.5x since 1995. A further positive is
that the Topixs dividend payout ratio is now 26%, up from 17% in 2004,
while the forecast 2014 ROE for CLSAs universe of 165 Japanese firms is
10.2%, up from 3.6% in 2009.
MSCI regional indices' performances, 2Q14

Note: Based on MSCI regional indices in US$ terms. Source: Datastream
For now the formal view is maintained to continue to recommend an
Overweight stance in Japan in a global equity context, even though the
Topix is up only 0.6% in US dollar terms year-to-date. This continuing
positive stance is based primarily on the view that the Bank of Japans
aggressive quantitative easing will lead to an asset inflation cycle, of which
there is already evidence in the property market. The view remains that if
deflation does end it will be a long-term positive for Japanese equities. But
if it does not, there will be another round of Bank of Japan balance-sheet
expansion which would also be equity bullish though also yen negative.
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
(x)
mean
+1sd
-1sd
0
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MSCI regional indices' performances, Year-to-date 2014

Note: Based on MSCI regional indices in US$ terms. Source: Datastream
As for the asset allocation within the Asia Pacific ex-Japan relative-return
portfolio, one longstanding feature has been a structural zero weight in
Australian financial stocks, primarily because of their leveraged business
models in a leveraged economy. This has resulted in a continuing major
Underweight in Australia in the relative-return portfolio (see following chart).
CLSA Asia Pacific ex-Japan country asset allocation

Source: MSCI, CLSA
This allocation worked in the past quarter in the sense that Australia
underperformed. The MSCI Australia Index rose by 1.8% in US-dollar terms in
2Q14, compared with a 5% gain in the benchmark MSCI AC Asia Pacific ex-
Japan Index, despite a continuing strong Australian dollar. As for Australian
financial stocks, which now represent 52% of the MSCI Australia and 13% of
the MSCI AC Asia Pacific ex-Japan benchmark, they also underperformed last
quarter rising by 2.3% in US-dollar terms.

(1)
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MSCI AC Asia Pacific ex-Japan benchmark weightings
CLSA Asia Pacific ex-Japan recommended weightings
(%)
Asia Pacific ex-Japan
relative-return
asset allocation
Australia underperforms



The Underweight in Australia will be maintained. First, it remains the case
that China is still trying to pursue rebalancing, which means limited
upside at best for Australias China-geared resources sector. Second, the
Australian dollar is still one of the worlds most overvalued currencies,
though it ended the quarter 15% below its peak level against the US dollar.
Third, the countrys household sector remains extremely leveraged with
the household debt/disposable income ratio at 150%, compared with
104% in the USA and 131% in Britain.
Still, the Australian dollar is likely only to weaken materially from current levels if
the Australian central bank cuts rates further, which is not yet anticipated by the
market consensus. This will hinge in part on perceptions of China and in part on
perceptions of the Australian domestic economy, which continues to suffer from
the relative strength of the local currency.
As for asset allocation in the rest of the Asia Pacific ex-Japan relative-
return portfolio, starting with Korea, the MSCI Korea slightly outperformed
the benchmark in the past quarter, rising by 6.4% in US-dollar terms. This
still makes Korea an underperformer year to date, having risen by 3.2%
compared with the benchmarks year-to-date gain of 5.5%.
Korea was maintained as a slight Underweight for most of last quarter.
Koreas low-beta macro status, in terms of its rising current account surplus
and lack of credit excesses, makes the won an attractive currency in the
emerging-market context. But a strong won is a negative for equities. A
further potential negative for the stock market remains the vulnerability of its
major exporters to a further weakening of the yen. In this respect Korea is a
hostage to what the Bank of Japan announces. It is also the case that Korean
export data shows scant sign as yet of a cyclical upswing. The other
longstanding structural negative for the Korean equity market is a lack of
dividend support.
MSCI Asia Pacific country performance, 2Q14

Note: Performance in US-dollar terms. Source: Datastream
India was the best performer last quarter, rising by 12.1% in US-dollar
terms, on the BJPs better-than-expected landslide victory in the general
election. This makes India the best performer year to date, rising by
20.9% in US dollar terms.
(4)
(2)
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(% QoQ)
Slight Underweight
Korea
India the best performer
Big Underweight in
Australia maintained



India was maintained as a more than double Overweight last quarter. From a
fundamental long-term perspective, India remains attractive as Asias most
domestic demand-driven economy. There is also growing evidence that the
economy has bottomed out while there are rising hopes that policies
introduced by new Prime Minister Narendra Modi will serve as a catalyst to
trigger a new investment cycle. India is discussed in more detail in the
country section on page 54.
MSCI Asia Pacific country performance, Year-to-date 2014

Note: Performance in US-dollar terms. Source: Datastream
The MSCI Hong Kong slightly outperformed the regional benchmark last
quarter rising by 6.7%. But it is still an underperformer year to date rising
by 2.6%. Hong Kong is maintained as an Underweight because of the
potential collateral damage to the local banking system from credit
tightening in China and because the local property market continues to be
impacted by the cumulative effect of a series of property-tightening
measures. There is also a growing risk of potential tensions with mainland
China over the so-called Occupy Central issue. The relative positives for
Hong Kong are a stable currency and strong dividend support.
Thailand again slightly outperformed last quarter, rising by 6.5% in US-dollar
terms. This makes it an outperformer year to date rising by 13.4%. Thailand
was again raised to an Overweight last quarter after briefly going Neutral
prior to the coup. The positives are relatively low valuations and hopes that
the military government will kick start the economy. The markets resilience
this year has been all the more remarkable, given continuing heavy selling by
foreign investors. But domestic institutions have remained consistent buyers.
Malaysia underperformed last quarter, with the MSCI Malaysia rising by 2.5%
in US-dollar terms. This means Malaysia is an underperformer year to date,
having risen by 1.6% in US-dollar terms. Malaysia is maintained as a Neutral
weighting. There is domestic demand momentum, with continuing evidence of
a government-driven investment cycle. The currency is stable while relatively
expensive stock market valuations remain supported by government-affiliated
domestic institutional investors.

(5)
0
5
10
15
20
25
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C
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(% Ytd)
Underweight
Hong Kong
Thailand outperforms
Neutral in Malaysia
More than double
Overweight in India



The MSCI Singapore underperformed slightly last quarter, rising by 4.1% in
US-dollar terms. This means it is also an underperformer year to date, rising
by 3%. Singapore is maintained as an Underweight because of the cumulative
negative impact of a series of property-tightening measures amid rising
property supply, as well as the growing evidence that credit growth has
peaked after an extended credit cycle. The markets main virtue remains the
availability of attractive dividend plays in a strong currency.
The Philippines again outperformed last quarter, rising by 8.7% in US-dollar
terms. This means it is an outperformer year to date having risen by 18.6%.
The Philippines has also now outperformed the regional benchmark by 74%
since the beginning of 2010.
MSCI AC Asia Pacific ex-Japan Index

Source: Datastream
The Philippine economy remains the best macro story in Asia, with overseas-
worker remittance income and business process outsourcing (BPO) revenue
continuing to drive the domestic consumption story, while there is also
growing evidence of an investment cycle. Meanwhile, any monetary-
tightening should be minimal with inflation under control and the country
enjoying a solid current-account surplus. The longstanding nine times
Overweight in the Philippines relative to the very low benchmark weighting is
maintained, while the major risk remains relatively high valuations.
Indonesia was an underperformer last quarter, declining by 1% in US-dollar
terms. But it is still an outperformer year to date, having risen by 19.7% in
US-dollar terms. The Overweight was reduced to a slight Underweight
during the past quarter because of growing evidence that the July
presidential election is becoming very close with Jakarta Governor Jokowis
lead in the polls declining substantially. The political situation is discussed in
more detail in the country section on page 58.
Taiwan again outperformed last quarter, rising by 10% in US-dollar terms.
This makes it an outperformer year to date, having risen by 11.3%. An
Overweight is maintained, primarily because of the improving prospects for
the dominant tech components sector as a result of the continuing boom in
tablets on the back of falling product prices. The tech sector currently
100
150
200
250
300
350
400
450
500
550
600
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Slight Underweight
Indonesia
Still Overweight Taiwan
The Philippines
outperforms
Still Underweight
Singapore
9x Overweight
the Philippines



accounts for 58% of the MSCI Taiwan Index. The tech sectors leading
companies also have a certain dividend support, making them comparatively
defensive. The other positive is the growing opportunity for Taiwans
services sector, particularly the banks, from hoped for liberalisation
measures with China.
MSCI AC Asia Pacific ex-Japan relative to MSCI AC World Index

Source: Datastream
Last but not least, China again underperformed last quarter, rising by 3.5% in
US-dollar terms. This makes it the worst performer year to date having
declined by 2.6% in US-dollar terms. The hopes for reform stemming from
the Third Plenum held in November were overshadowed by renewed evidence
of cyclical slowdown and declining credit growth. China was maintained as an
Underweight during the past quarter.
The main positive for China remains cheap valuations. CLSAs universe of
128 Hong Kong-listed Chinese shares trades at 8.7x forecast 2014 earnings.
Still, the investment story in this cycle remains complicated by the desire of
the Chinese leadership to rebalance the economy, coupled with the
structural risks posed by the surge in broad credit growth in recent years
and the resulting need to deflate a credit bubble without triggering a
systemic crisis. There is also now downside currency risk, given the
adjustment in exchange-rate policy implemented in March. Meanwhile, the
best long-term investment case for China is that pursuit of reform will lead
to multiple expansion for Chinese equities as the SOE sector allocates
capital more efficiently.
As for Chinas A-share market, the Shanghai Composite Index rose by a
marginal 0.7% in renminbi terms last quarter. The index is still down 3.2%
year to date and ended the quarter still 2.5% below its 200-day moving
average (see following chart).
50
70
90
110
130
150
170
190
210
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
(1/1/88=100)
Underweight in China
Shanghai A-share market



Shanghai Composite Index

Source: Bloomberg
Finally, an out-of-the-index bet is maintained in Vietnam. This bet did not
work last quarter with the Vietnam Stock Index declining by 3.4% in US-
dollar terms. But the index is still up 13.2% year to date, which makes it an
outperformer. This follows the 20.5% gain in 2013 when Vietnam was the
second-best performer in Asia after Japan.
Vietnam Stock Index

Source: Bloomberg
The above asset allocation is for relative-return investors. The regional
thematic Asia ex-Japan long-only absolute-return portfolio, free from the
tyranny of benchmarks, is shown in the following table. This portfolio is not
trying to outperform a benchmark, but simply attempting to make money,
though it is important to note that the portfolio has not been allowed to own
cash since its inception at the end of 3Q02. This naturally limits the options
considerably when regional markets decline. The portfolio is measured by
taking one or two mostly liquid stocks for each theme selected.
1,800
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
3,600
J
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9
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1
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1
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1
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1
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1
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1
4
Shanghai Composite Index 200-day moving average
0
200
400
600
800
1,000
1,200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(28/7/00=100)
Out-of-the-index bet
in Vietnam
Asia ex-Japan
long-only portfolio



Asia ex-Japan thematic equity portfolio for long-only, absolute-return investors
Themes Weight (%) Stock picks
Asean auto dealer 3 Kolao Holdings
Australia gold mining 5 Newcrest Mining
China internet hosting 4 21Vianet
China internet media 5 Tencent
China online retailer 5 Vipshop
China online-offline travel company 3 Ctrip
India banks 15 HDFC Bank (5%), IndusInd Bank (5%),
ICICI Bank (5%)
India cement 4 Grasim Industries
India consumer 3 Titan Industries
India housing finance 7 HDFC (4%), GRUH Finance (3%)
India media 4 Zee Entertainment
India property 3 Prestige Estates
India search engine 3 Just Dial
Philippines banks 10 Metrobank (5%), BPI (5%)
Philippines consumer 5 Universal Robina
Philippines media 4 ABS-CBN
Singapore dividend plays 5 SATS
Taiwan tech component makers 4 MediaTek
Thailand cement 4 Siam Cement
Thailand property 4 Land and Houses
Note: Readers should refer to the relevant CLSA research reports for detailed analysis & disclosures.
Source: CLSA
The long-term performance of the Asia ex-Japan thematic portfolio remains
for now respectable. Since its inception at the end of 3Q02, the portfolio has
risen by 758% in US-dollar terms, compared with a 236% increase in the
MSCI AC Asia ex-Japan and a 140% increase in the S&P500 (see following
chart). This means the portfolio has risen by an annualised 20.1% since
inception, compared with an annualised 10.9% increase in the MSCI AC Asia
ex-Japan and an annualised 7.8% gain in the S&P500.
The portfolio again outperformed the regional index last quarter rising by
12.9%, compared with a 6.2% gain in the MSCI AC Asia ex-Japan. This
means the portfolio has outperformed substantially year to date, having risen
by 23.7% compared with a 5.1% gain in the regional index. The
outperformance was primarily driven by the 39% weighting in Indian stocks,
which amounts primarily to a bet on Modi.
The portfolio, which aims to invest in the best long-term stories, remains
predominantly invested in domestic-demand names. The main country bets
are India and emerging Asean, which represent 39% and 30% of the
portfolio respectively. The portfolio continues to be primarily geared to the
domestic story. There is also a practical limit to what can be done to hedge
the long-only Asia ex-Japan portfolio, given the lack of cash options.
Thematic stock picks
Long-term portfolio
performance
Short-term portfolio
performance



Thematic portfolio performance relative to the MSCI AC Asia ex-Japan

Note: Asia ex-Japan thematic portfolio for long-only, absolute-return investors. Not including dividends
paid. Source: CLSA
As a matter of historical record, it was officially recommended in mid-
2007 that owners of the Asia ex-Japan portfolio should short Western
financial stocks as a necessary hedge, given the relatively high-beta
nature of the portfolio and the severe collateral risk facing Asian stocks
by the unwinding of the Western credit bubble. This recommended hedge
was narrowed in May 2010 to shorting only European financial stocks
because the greatest systemic risk globally was by then in Euroland,
centred on sovereign-debt concerns and European banks exposure to
that sovereign debt. This recommended hedge was closed out on 16
January 2012 because of the upside risk posed by the then LTRO-driven
risk on trade. The Euro Stoxx Banks Index is since up 62% in US-dollar
terms from its 16 January 2012 level, while the Bloomberg European
Financials Index is up 65% over the same period. No recommended
hedge has, for now, been reintroduced.
Fundamentally, the domestic-demand bias of the Asia ex-Japan long-only
portfolio will also be maintained since the view here is that, on a long-term
basis, Asia ex-Japan will incrementally become much more of a domestic-
driven asset class. Finally, it should be noted that the stated performance of
the absolute-return portfolio does not include dividends paid. The
performance comparison is made with the non-total-return MSCI AC Asia
ex-Japan (ie, excluding dividends).
The absolute-return thematic portfolio for Japan, introduced on 17 March
2005, is shown in the following table. It marginally outperformed the Topix
in the past quarter, rising by 6.4% in yen terms compared with a 5.0%
gain in the Topix. This means the portfolio is also a slight outperformer
year to date, declining by 2% in yen terms compared with a 3.1% decline
in the Topix.

0
100
200
300
400
500
600
700
800
900
Oct 02 Feb 04 Jun 05 Oct 06 Feb 08 Jun 09 Oct 10 Feb 12 Jun 13
Asia ex-Japan thematic portfolio
MSCI AC Asia ex-Japan Index
(30 Sep 02=100)
Hedging history
Japan long-only portfolio



Japan absolute-return, long-only thematic portfolio
Theme Weight (%) Stocks Description Weight (%)
Real Estate 29 Mitsubishi Estate real estate company 9
Mitsui Fudosan real estate company 6
Sumitomo Realty real estate company 5
Sekisui House property developer 5
Daiwa House property developer 4
Transportation 4 East Japan Railway railway company 4
Autos 9 Isuzu Motors truck maker 5
Toyota Motor automaker 4
Machinery 13 Keyence optical-sensor maker 4
Fanuc industrial robot maker 3
Nabtesco precision gear manufacturer 3
Mitsubishi Heavy heavy machinery maker 3
Consumer 17 Sugi Holdings drugstore operator 4
Tsuruha Holdings drugstore operator 6
Seven & I convenience-store operator 4
Lawson convenience-store operator 3
Airport 3 Japan Airport Terminal Haneda airport operator 3
Financials 13 Sumitomo Mitsui Trust specialist financial institution 5
SMFG national bank 4
Zenkoku Hosho mortgage guarantee company 4
Healthcare 6 Ship Healthcare medical equipment distributor 3
Nihon Kohden medical equipment
manufacturer
3
Construction 6 Kajima general contractors 3
Taisei general contractors 3
Source: CLSA
From a longer-term perspective the Japan portfolio is up 57.4% in yen terms
and 62.4% in US-dollar terms since inception, while the Topix has risen by
5.9% in yen terms and 9.2% in US-dollar terms over the same period (see
following chart). This translates into an annualised gain of 5.0% in yen terms
since inception, compared with a 0.6% annualised gain for the Topix. Again,
the portfolio may not own cash. As with the Asian portfolio, the stated
performance does not include dividends paid and the performance
comparison is made with the non-total-return Topix. The Japan portfolio is a
combination of domestic-demand names and exporters, though with the
major bet remaining on domestic-driven asset reflation plays.
Performance data



CLSA Japan thematic portfolios performance relative to the Topix

Note: Performance in yen terms. Source: Datastream, CLSA
The global portfolio for US-dollar-based long-term global investors, such as
pension funds, is shown in the following table. The portfolio remains dominated,
as it has been since inception, by the weightings in physical gold bullion and
unhedged gold-mining stocks, which still account for 50% and 20% of the
portfolio respectively. There was no change in the portfolio last quarter.
Recommended long-only asset allocation for US-dollar-based pension funds
Weight (%) Investment Type
50 Physical gold bullion
30 Asia ex-Japan equities, weighted according to the long-only thematic portfolio
20 Unhedged gold mining stocks
Source: CLSA
The gold bullion price is up 10.1% in the first half of 2014. This follows the
28% decline in 2013, the biggest annual drop since 1981. While the unhedged
gold mining index outperformed bullion, rising by 21.6% year to date. Despite
the continuing risk posed by consensus expectations of a normalisation in Fed
policy, a long-term bullish view is maintained on gold bullion with the price
target continuing to be set at a minimum of US$3,360/oz. This view is
maintained because the view here is that central banks will not be able to exit
from unconventional monetary policy in a benign manner and will remain
committed to ongoing balance-sheet expansion. Such policies ultimately
threaten the stability of the current fiat paper money system.
The above asset allocation means that the global portfolio is still set up for a
long-term dollar-debasement trade, which could also be a fiat-currency
debasement trade, given the growing resort to aggressive quantitative easing
extending beyond America, most notably in Japan but also increasingly likely
in the Eurozone. The fundamental view here remains that it is much easier to
enter unorthodox monetary policy regimes than to exit from them. This view
is maintained despite investors growing confidence that American monetary
policy will normalise. Indeed, the longer-term risk is that unorthodox
monetary policy spreads from the developed world to the emerging world,
though hopefully such an outcome can be avoided.
50
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90
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130
150
170
190
Mar 05 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14
Japan thematic portfolio Topix
(17 Mar 05=100)
Global portfolio



Such a failure to exit from unorthodox monetary policy in a benign manner is
likely to culminate in the collapse of the US-dollar paper standard to the
benefit of gold-bullion owners, given the likely (and, indeed, increasingly
visible) attempts by the relevant monetary authorities to try to reflate their
way out of the problem. It should also again be emphasised that the
investment in gold is viewed as insurance, not as a short-term trade. This
is a long-term portfolio, which seeks to balance the long-term risks and
opportunities in the current global context.
Gold bullion price

Source: Bloomberg
NYSE Arca Gold BUGS Index/gold-bullion price ratio

Note: The NYSE Arca Gold BUGS Index is a modified equal-dollar weighted index of 16 unhedged gold-
mining stocks. Source: Bloomberg, CLSA

0
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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
(US$/oz)
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Gold as insurance

Japan: Inflation stress test Asia Maxima


Japan: Inflation stress test
Despite a disappointing start to 2014 for the Tokyo stock market, there are
legitimate grounds to hope that Japan is emerging from its long-running
deflationary trend. Consider, for example, growing evidence that the Japanese
labour market is tightening. Labour shortages have extended beyond the
well-known area of construction workers. Thus, a recent Nikkei poll of
restaurant operators in Japan shows that 85% of the respondents had a
harder time finding workers in fiscal 2013 than in the previous year, up from
60% in FY12 and 40% in FY11. Meanwhile, Fast Retailing President Tadashi
Yanai said last month that he wants to convert about half of the staff in
domestic Uniqlo outlets into permanent staff within the next 12-18 months.
This comes as the latest land ministry data released at the end of June
showed that the jobs-to-applicants ratio rose from 1.08 in April to 1.09 in
May, the highest level since June 1992.
Index movement

Source: Datastream
As for the prospects for inflation, the data for April and May is distorted by the
sales-tax increase. But the latest data is certainly not bad enough to force the
Bank of Japan (BoJ) to move proactively. Thus, nationwide core CPI inflation,
excluding fresh food, rose from 1.3% YoY in March to 3.2% YoY in April and
3.4% YoY in May, while core-core CPI inflation, which excludes food and
energy, rose from 0.7% YoY to 2.3% YoY and 2.2% YoY in the same periods.
True, stripping out the sales-tax-hike effect using the methodology proposed by
the BoJ, nationwide core-core inflation slowed from 0.8% YoY in April to 0.5%
YoY in May. But the adjusted Tokyo core-core inflation picked up from 0.4% YoY
in May to 0.5% YoY in June.
The next few months of inflation data will be critical as the impact of last years
yen deprecation drops out of the data. As for the impact of the sales-tax
increase on domestic demand, it does not for now look as bad as might have
been expected. April retail sales were almost in line with expectations, falling
by 4.3% YoY compared with a consensus forecast 3.3% YoY decline, and were
down only 0.4% YoY in May. Meanwhile, a Nikkei poll of the 100 top retailers
conducted at the end of April shows over half of the respondents believe the
post-sales-tax hangover will be over by the end of May, with another one-third
expecting it to be concluded by the end of June.
This is why the real test for the Bank of Japans policy, in terms of both inflation
and retail sales, will come in the third quarter of this calendar year, by when
the Japanese central bank is also expecting a renewed rebound in activity. If
this is not forthcoming, pressure will grow for renewed central bank activism.
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Topix 200-day moving average
Growing labour shortages
Inflation data
Third quarter stress test



Meanwhile, from a stock-market standpoint, it is a positive signal that the Topix
is now 11% above its 2014 low, even though the US 10-year Treasury bond yield
is near its 2014 low and the yen is still 3.5% above its weakest point in 2014
relative to the US dollar. For if the Japanese stock market is to emerge
successfully from deflation and enter a sustained bull market, as opposed to an
unsustainable boom-bust asset-inflation cycle, it needs to break the correlations
with the 10-year Treasury bond yield and the yen-dollar exchange rate which
have been in place since the bursting of the bubble in 1990.
For now BoJ Governor Kuroda remains confident his policy is working. If his
optimism proves warranted, and inflation is seen to be taking hold, it will
raise a problem of success for the BoJ. That is, the central bank will need to
start allowing the yield curve to steepen gradually, by reducing central-bank
buying of JGBs at the long end, to send a market signal that the policy is
working. Meanwhile, the latest Japanese flow-of-funds data shows public
pension funds sold a net 1.85tn of JGBs in 1Q14, selling allowed by ongoing
BoJ purchases of JGBs. This was the biggest net selling of JGBs by public
pensions since 2Q12.
Amid much scepticism on Third Arrow structural reform, Prime Minister
Shinzo Abe unveiled an economic-reform package in late-June aimed at
revitalising the Japanese economy. The plan calls for lowering the effective
corporate tax rate for Japanese companies from the current 35.6% to the 20s
over several years starting in fiscal 2015, among other things. From a narrow
stock-market perspective, the plan also calls for companies to increase their
ROEs to global levels. This follows the setting up in January of the JPX-Nikkei
400 Index, comprising 400 high-ROE Japanese stocks. The aim here is again
to encourage companies to boost ROE, with 40% of the qualifying criteria for
inclusion in the index dependent on ROE. The three-year average ROE of the
index constituents was 11.1% in FY13, compared with 5.7% for the Topix.
The Osaka Exchange also announced in June that a JPX-Nikkei 400 futures
market will be launched on 25 November. Meanwhile, so far this year, 245
Japanese corporates have announced share buybacks worth a total of 2.6tn,
up 44% YoY, according to Bloomberg.
Finally, the other positive is that Abes popularity rating remains for now
relatively resilient. Thus, the latest Kyodo News poll conducted in June shows
that Abes approval rating remained at 52%, 18 months after taking office.
This is high compared with most prime ministers in the last 15 years most of
whom did not even last that long. But one who did, Junichiro Koizumi, had a
60% support rating after 18 months in office.
CLSA Japan universe trailing price-to-book

Note: Horizontal lines denote mean and +/- 1sd. Source: CLSA evalu@tor
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Yield curve management
ROE focus
Abe popularity rating



Japan job offers to applicants ratio

Source: Ministry of Health, Labour and Welfare (MHLW), CEIC Data
Japan and Tokyo core-core CPI infliaton (adjusted for sales tax hike effect)

Note: Adjusted for the sales tax hike effect by the methodology proposed by the Bank of Japan. Data up to May
2014 for the nationwide index and June 2014 for Tokyo CPI. Source: Statistics Bureau, Bank of Japan, CLSA
Japan retail sales growth

Source: Ministry of Economy, Trade and Industry (METI)
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
(x)
(2.0)
(1.5)
(1.0)
(0.5)
0.0
0.5
1.0
2
0
0
0
2
0
0
1
2
0
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2
2
0
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2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
(% YoY) Japan core-core CPI inflation (excl. food & energy)
Tokyo core-core CPI inflation (excl. food & energy)
(15)
(10)
(5)
0
5
10
15
1
9
8
4
1
9
8
5
1
9
8
6
1
9
8
7
1
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8
8
1
9
8
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1
9
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0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
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6
1
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7
1
9
9
8
1
9
9
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2
0
0
0
2
0
0
1
2
0
0
2
2
0
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3
2
0
0
4
2
0
0
5
2
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6
2
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2
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2
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1
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1
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2
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1
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2
0
1
4
(% YoY)
Improving
But inflation
data is now
sales-tax
distorted . . .
. . . As is retail
sales data



Topix and yen-dollar exchange rate

Source: Bloomberg
Japan public pension funds' net buying of JGBs

Source: Bank of Japan - Flow of Funds Accounts
JPX-Nikkei 400 Index relative to Topix

Source: Datastream, CLSA
100
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102
103
104
105
106
1,100
1,150
1,200
1,250
1,300
1,350
Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14
Topix Yen/US$ (RHS)
(4)
(2)
0
2
4
6
8
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9
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p

1
2
M
a
r

1
3
S
e
p

1
3
M
a
r

1
4
(tn)
99.7
99.9
100.1
100.3
100.5
100.7
100.9
101.1
Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14
(1/1/14=100)
Correlation
breakdown?
Some signs of
domestic
institutions
selling JGBs
The ROE index

Australia: Mining and housing paradox Asia Maxima


Australia: Mining and housing paradox
The Australian economy continues to show a combination of tepid domestic
demand combined with ongoing evidence of a steep decline in mining-sector
capex. On the domestic-demand side, retail-sales data have been week
during the past quarter. Thus, retails sales rose by only 0.2% MoM in April,
down from 1.1% MoM in January. While on a 3M/3M basis, retail-sales growth
has decelerated from 2.2% in January to 1.3% in April.
Index movement

Source: Datastream
As for mining-sector capex, new investment fell 8.7% QoQ in real terms in
1Q14, marking the second consecutive quarterly decline and the biggest
decline since 2Q09. Still, a compensating factor was continuing strong
property-related investment reflecting ongoing strong demand from
foreigners, predominately Chinese, for Australian property. Real dwelling
investment rose by 4.7% QoQ and 8% YoY in 1Q14. While the latest building-
approvals data show that private houses approved rose by 16.5% YoY in
April. Australias Foreign Investment Review Board reported in March that the
Chinese had invested A$5.9bn in Australian property during the fiscal year
ended June 2013, up 42% YoY.
Chinese property demand, filled by mainland developers pre-selling
developments in China, is the main catalyst behind a renewed surge in
domestic home prices. The RP Data-Rismark Home Value Index rose by
10.7% YoY in May, with home prices in Sydney rising by 16.6% YoY. It is not,
however, reflected in a big pick up in mortgage lending domestically, as a
consequence of anaemic income growth and continuing high household debt
in aggregate, even though there has been significant deleveraging in recent
years. Thus, housing loans rose by 6.2% YoY in May, while the quarterly
wage-price index growth, which measures hourly pay rates, excluding
bonuses, slowed from 3.8% YoY in 2Q12 to 2.6% YoY in 1Q14, the slowest
year-on-year growth since the index began in 3Q97. The household debt-to-
disposable-income ratio has fallen from a peak of 153% in 3Q06 to 150% in
1Q14, compared with 104% in the US and 131% in Britain.

1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
S&P/ASX200 200-day moving average
Tepid domestic demand
Mining sector capex
declines
House price surge



Meanwhile, the Australian central bank has remained on hold. Still, the
continued relative strength of the Australia dollar makes it likely that the next
move will be a rate cut not a rate hike, even though this is not what money
markets are currently discounting. The Australian real effective exchange rate
has risen by 66% since bottoming in March 2001 and is now 14% above its
long-term average since 1964. Yet the cash-rate futures are now discounting
a 25bp rate hike in late 2015. On this point, so long as Australian short-term
rates are a positive 2.5%, and most of the rest of the developed world is at
zero, or near zero, it is a major support for the Australian dollar to the
chagrin of the Reserve Bank of Australia (RBA), which now understands that
currency strength poses a risk for the economy, given the likely secular
decline in mining-sector capex.
Meanwhile, Australian bank stocks, like the Australian dollar, continue to be
beneficiaries, in terms of their valuations, of what CLSAs Australian bank
analyst Brian Johnson has aptly described as the QE-ternity trade (see CLSA
research Australian Banks - G.O.A.T.: Are they really the greatest of all time?,
2 June 2014). This is primarily because the Australian banks average dividend
yield of 5.4% remains attractive to equity investors in a world of zero rates.
Indeed, Johnson describes Australian banks, which represent 9.4% of the MSCI
Asia Pacific ex-Japan Index, as one of the biggest valuation bubbles globally. On
this point, note that dividend payout ratios are running at more than 70%. The
bubble risk for Australian banks is asset quality, given significant writebacks in
recent years and the resulting lack of loan losses cover. Thus, major Australian
banks loan-loss charges peaked at 76bp of gross loans in FY09 and have since
declined to only 18bp in 1HFY14 ended 31 March.
It is, therefore, clear that the biggest risk to Australian bank shares, aside
from a deterioration in the domestic credit cycle, is a QE-exit. But for now,
investors have no conviction that it is about to occur. Meanwhile, Australian
bank shares, and also other Australian equities, also continue to be supported
by the compulsory 9.25% of Australian salaries flowing into superannuation
schemes, resulting in an estimated A$1bn flows into equities every week.
CLSA Australia universe trailing price-to-book


1.3
1.6
1.9
2.2
2.5
2.8
3.1
3.4
3.7
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Central bank stance
Bank stock valuations



Australia retail sales growth %MoM

Source: Australian Bureau of Statistics
Australia mining sector new capex growth

Source: Australian Bureau of Statistics
Australia RP Data-Rismark Home Value Index

Note: Average dwelling prices in eight capital cities. Source: RP Data
(0.6)
(0.4)
(0.2)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
J
a
n

1
1
A
p
r

1
1
J
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1
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O
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3
J
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1
3
O
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t

1
3
J
a
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1
4
A
p
r

1
4
(% MoM)
(60)
(40)
(20)
0
20
40
60
80
100
120
(15)
(10)
(5)
0
5
10
15
20
25
30
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
New mining capex volume
% YoY (RHS)
(% YoY) (% QoQ, sea adj)
400
420
440
460
480
500
520
540
560
580
600
620
640
660
(8)
(6)
(4)
(2)
0
2
4
6
8
10
12
14
16
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(% YoY) %YoY Index (RHS)
On the way
down . . .
. . . Also on the
way down
China-driven
surge



Australia wage price index growth

Note: Total Hourly Rates of Pay Excluding Bonuses. Source: Australian Bureau of Statistics
Australia real effective exchange rate

Note: Inflation-adjusted trade-weighted exchange rate. Narrow index comprising 27 economies.
Source: BIS, CLSA
Australia system credit growth and nominal GDP growth

Source: Reserve Bank of Australia, Australian Bureau of Statistics
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
4.3
4.5
S
e
p

9
8
M
a
r

9
9
S
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p

9
9
M
a
r

0
0
S
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p

0
0
M
a
r

0
1
S
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p

0
1
M
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0
2
S
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3
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4
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S
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7
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a
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0
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S
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0
8
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a
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0
9
S
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p

0
9
M
a
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1
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S
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1
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1
1
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1
1
M
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S
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1
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1
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M
a
r

1
4
(% YoY)
60
70
80
90
100
110
120
130
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
(2010=100)
(5)
0
5
10
15
20
25
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
(% YoY)
Australia nominal GDP growth
Australia system credit growth
Wages under
pressure . . .
. . . But currency
remains
expensive
Relatively feeble
recovery

China: Conflicting signals Asia Maxima


China: Conflicting signals
The easing of reserve-requirement ratios late last quarter has again raised
hopes that more aggressive stimulus is coming in China. But this still remains
more a case of fine tuning than real stimulus, most particularly as cuts in the
reserve-requirement ratio do not necessarily lead to more credit growth so long
as banks are constrained by numerical limits on their loan-to-deposit ratios.
Index movement

Source: Datastream
The sense, therefore, is that the current PRC leadership remains intent on
resisting calls for overt aggressive stimulus measures, a position that is likely to
be maintained so long as the employment market remains stable and exports are
not collapsing. Meanwhile, the latest data from China has raised hopes for more
of a cyclical uptick with PPI deflation easing from 2% YoY in April to 1.4% YoY in
May. Yet, the all-important property market is still in a market-driven downtrend
with the weakening price trend now reaching tier-one cites. Thus, new home
prices in four tier-one cities fell by an average of 0.1% MoM in May, the first
decline in two years, according to the National Bureau of Statistics. It is also
interesting that, in a sign of growing cautious sentiment among developers, land
sales have slowed dramatically. Land purchases by a panel of 26 listed
developers that CLSAs China Reality Research tracks declined by 50% YoY in
volume terms and 60% YoY in value terms in May.
True, there will be more fine tuning examples of easing in coming months.
But for now the Chinese leadership seems more committed to trying to
change behaviour than its predecessor. In a parallel and related development,
the Partys anti-corruption campaign remains in full swing in terms of
investigations and detentions of senior officials with the campaign lately
moving from the oil sector to the energy sector. This raises a larger point.
This is that in an economic model, significantly driven by public sector-related
investment activity, anti-corruption campaigns have a potentially
contractionary economic impact beyond the obvious political issues raised.
The attitude of investors towards China remains schizophrenic. On the one
hand they want to see reform, on the other hand they want to celebrate any
signal that easing is at hand. This reflects the reality that investors, be they
Chinese or foreigners, have become hypersensitive to policy signals in terms of
signalling inflection points in the Chinese market. This is particularly the case
as regards the property market, given its critical importance both in terms of
serving as collateral for the banking system as well as being the major source
of demand for the domestic economy. Thus, primary residential sales
accounted for a record 11.9% of Chinas GDP in 2013.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Shanghai Composite 200-day moving average
No major stimulus
Contractionary anti-
corruption campaign



For now, the likelihood is that the economy will continue to slow as reflected in
the deflationary signal of rapidly falling nominal GDP growth. Thus, nominal GDP
growth slowed from 9.7% YoY in 4Q13 to 7.9% YoY in 1Q14, the slowest growth
rate since 2Q09. Meanwhile, if the policymakers continue to tolerate extend and
pretend in the banking system, in terms of the rolling over or warehousing of
problem loans, deflationary risks will continue to mount and velocity will continue
to decline - as it has done since the onset of the post-Lehman stimulus in 2009.
On this point, corporate bank-deposit growth slowed to a two-year low of 5.1%
YoY in April and 5.6% YoY in May, while overall bank-deposit growth was also at a
record low of 10.6% YoY in May, driven by the ongoing loss of bank deposits to
higher yielding alternatives.
Meanwhile, there is one potential catalyst for more pronounced central-bank
easing. That is renewed capital outflows. Estimated hot money flows,
measured as the change in financial institutions positions for forex purchases
less the trade balance and net FDI, fell to an outflow of Rmb15bn in April and
Rmb204bn in May, compared with a Rmb118bn inflow in March. In the
meantime, the property market and capital flows are the key areas to monitor
in coming months, while investors wait to see the degree of the central
governments commitment to reform.
Another related point is that the deadline is now looming for the maturing of
so-called trust products in the second half of this year and throughout 2015.
This represents a potential stress test of the system, most particularly as it
remains far from clear that it will be as easy to refinance maturing products
as was the case previously. This is because the demand for trust products is
cooling because there is more awareness of credit risk and also because of
more interesting alternatives. The resulting slowdown in new issuance means
that repayment pressure is likely to be rising later this year. Thus, data from
financial data provider Wind shows that new monthly issuance of trust WMPs
sampled by Wind has fallen from Rmb89bn in December to Rmb48bn in May.
The coming stress test for trust WMPs is best illustrated by the CRR estimate
that Rmb3.5-4tn is coming due in 2014, of which more than Rmb2tn will be in
the second half of this year. The ideal circumstance for those looking for a
buying opportunity in China is for the authorities to allow some selective
defaults, imposing some much-needed market discipline on the shadow
banking sector, without provoking a wholesale panic out of every trust
product where total assets under management reached Rmb11.73tn at the
end of 1Q14, according to the China Trustee Association. If this is a delicate
exercise, it should be possible for the authorities to pull off such a balancing
act, most particularly as they appear to be fully aware of the problem.
CLSA China universe trailing price-to-book

1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Slowing nominal GDP
growth
Maturing trust products
Renewed capital outflows



China nominal GDP growth and PPI inflation

Source: CEIC Data
China average new home price growth in four tier-one cities

Note: Average of new home price growth in Beijing, Shanghai, Shenzhen and Guangzhou. Based on
newly constructed commodity residential properties. Source: National Bureau of Statistics (NBS) - Survey
of home prices in 70 major cities.
Land purchases by 26 leading listed developers in China

Source: China Reality Research (CRR)
1
3
5
7
9
11
13
15
17
19
21
23
25
(10)
(8)
(6)
(4)
(2)
0
2
4
6
8
10
12
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(% YoY)
(% YoY)
China Producer Price Index (PPI) inflation
Nominal GDP growth (RHS)
(8)
(4)
0
4
8
12
16
20
24
(1.0)
(0.5)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
J
a
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1
1
F
e
b

1
1
M
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1
1
A
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1
M
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1
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1
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1
2
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1
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1
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1
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1
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1
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1
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1
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1
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1
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1
4
F
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1
4
M
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1
4
A
p
r

1
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M
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1
4
(% MoM)
New home price average
New home price average (RHS)
(% YoY)
0
10
20
30
40
50
60
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
S
e
p

0
7
D
e
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0
7
M
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r

0
8
J
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0
8
S
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p

0
8
D
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0
8
M
a
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0
9
J
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0
9
S
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p

0
9
D
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0
9
M
a
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1
0
J
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1
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1
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1
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1
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1
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1
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1
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1
2
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1
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1
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1
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1
3
J
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1
3
S
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1
3
D
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1
3
M
a
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1
4
(000 m) (Rmbbn) GFA (LHS) Trading value
Will the
correlation
hold?
Property
prices start to
decline . . .
. . . As land sales
collapse



Shanghai Composite Index

Source: Bloomberg
China total and corporate deposit growth

Source: CEIC Data, PBOC
WMPs issued by trust companies sampled by Wind

Note: It tracked the new WMPs issued by 67 trust companies every month by collecting the public
information. Source: Wind
1,800
2,000
2,200
2,400
2,600
2,800
3,000
3,200
3,400
3,600
J
a
n

0
9
A
p
r

0
9
J
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l

0
9
O
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0
9
J
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1
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A
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1
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1
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1
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1
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1
2
J
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1
3
A
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1
3
J
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l

1
3
O
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t

1
3
J
a
n

1
4
A
p
r

1
4
Shanghai Composite Index 200-day moving average
(5)
0
5
10
15
20
25
30
35
40
J
a
n

0
8
A
p
r

0
8
J
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O
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0
8
J
a
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0
9
A
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0
9
J
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0
9
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0
9
J
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1
0
A
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1
0
J
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1
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1
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1
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1
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1
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J
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1
4
A
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1
4
(% YoY) China total renminbi deposit growth
Non-financial enterprise deposit growth
6.0
6.5
7.0
7.5
8.0
8.5
9.0
0
10
20
30
40
50
60
70
80
90
100
J
a
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1
0
M
a
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1
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M
a
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1
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J
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1
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S
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1
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N
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1
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J
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1
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1
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1
4
M
a
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1
4
M
a
y

1
4
(Rmbbn) (%) Value issued Average yield (RHS)
Still no "break
out"
Weak deposit
growth . . .
. . . As yields
remain high on
"trust" products

Hong Kong: A degree of tension Asia Maxima


Hong Kong: A degree of tension
Perhaps the most interesting economic data point last quarter was a
disappointing 9.8% YoY decline in Hong Kong retail sales in April. This served
to crystallise growing concerns about a decline in spending by mainland
tourists. Thus, CLSAs economics team cut its 2014 retail sales growth
forecast to 2%, down from 11%.
Index movement

Source: Datastream
The above follows growing evidence that Hong Kong is losing market share for
mainland tourists to other locations, most notably Europe and America. This
reflects a combination of factors including declining novelty value, a growing
comfort with travelling longer distances and Hong Kongs lack of price
competiveness given still sky-high retail rents. The growth in mainland visitors
has slowed from 24.2% in 2012 to 16.7% in 2013 and 13.1% YoY in May.
But there is another issue. That is growing news reports of increased tensions
between mainland visitors and Hong Kong residents, with concerns increasing
that mainlanders have put heavy strains on local public transport and health
facilities. This has even led to suggestions that the quota for mainland visitors
should be cut or that there should be an entry tax. However, this would have
negative economic consequences, since CLSAs economics team estimates
that, for example, a 20% decline in same-day visitors from the mainland
would lead to a US$1.7bn decline in tourism revenue for Hong Kong,
equivalent to 0.6% of Hong Kongs GDP.
So, quotas or entry taxes would seem unlikely given the economic impact. They
will also not be welcomed by Beijing, most particularly as there are once again
growing political tensions between Hong Kong and the mainland. These have
centred on the so-called Occupy Central movement, a coalition of civil-society
organisations threatening a campaign of civil disobedience in the form of taking
over Hong Kongs Central business district if Beijing reneges on its pledge to
introduce the election of a chief executive by universal suffrage in 2017. The fear
of the would-be demonstrators is that Beijing will set up some form of
nomination committee it can control that would weed out undesirable candidates.
As ever, most people in Hong Kong value stability above all else. Still the
situation is becoming more politicised, a fact reflected in the decision of
Chinas State Council to issue a White Paper on Hong Kong on 10 June. While
this document acknowledges the context of the one country, two systems
formula agreed with Britain in 1984, it also asserts that Chinas sovereignty,
security and development interests have greater weight than Hong Kongs
autonomy, over which Beijing has the power of oversight.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Hang Seng Index 200-day moving average
Declining retail sales
Mainland tourism story
Occupy Central
Beijings White Paper
on Hong Kong



There is then the potential for an increase in political tensions if the proposals
to be published soon by the Hong Kong Government are deemed
unacceptable by the pro-democracy protestors. Meanwhile, the local economy
faces both the slowdown in retail sales plus the continuing potential
vulnerability of the local property market to any US interest-rate hikes. In this
respect, Hong Kong residential-property prices remain remarkably resilient
given the aggressive property tightening measures introduced in recent
years. The Centa-City Leading Index of apartment prices has risen by 3.4%
from its recent low reached in early March, and is only 2% below the all-time
high reached in March 2013. Still the risk is clearly to the downside.
Meanwhile, property transactions have bounced off their recent lows primarily
because of the pent-up demand. Weekly secondary sales in 35 residential
developments monitored by Midland Realty have risen from an average of 65
units in 1Q14 to an average of 110 in 2Q14.
The past quarter saw the Hong Kong Monetary Authority (HKMA) provide
more information on the details of the Hong Kong banking systems growing
mainland exposure. Hong Kong banks net external claims on mainland banks
increased by 65% YoY to a record HK$2.48tn at the end of March, up from
only HK$60bn at end-2009.
HKMA deputy chief executive Arthur Yuen noted in a press briefing in April
that mainland-related customer loans, excluding trade-finance loans of
HK$313bn, totalled HK$2.276tn at the end of 2013, of which 43% related to
foreign bank branches in Hong Kong. He also noted that, including trade
financing, the Hong Kong banking sectors mainland-related loans totalled
HK$2.59tn at the end of 2013, with half going to state-owned enterprises,
31% to the Chinese subsidiaries of international groups, and 19% to private
enterprises in the mainland. The Hong Kong banking systems rising mainland
exposure is the natural consequence of the renminbi offshore market in Hong
Kong. Renminbi deposits now total Rmb956bn or 12.5% of total Hong Kong
bank deposits.
Finally, a potential positive for the Hong Kong stock market is that Beijing
approved in April the development of a through-train pilot programme to
allow mutual stock market access between Shanghai and Hong Kong. The
scheme, due to start in October, will allow individual investors to trade in each
others stock market.
CLSA Hong Kong universe trailing price-to-book

0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Residential
property market
Rising mainland exposure
Through-train
pilot programme



Hong Kong retail sales value growth

Source: CEIC Data
Hong Kong growth in tourist arrivals

Source: CEIC Data, Hong Kong Tourism Board
Centa-City Leading Index

Note: Index of apartment prices in 100 private residential developments. Source: Centaline Property Agency
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
25
30
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
(% YoY, 3mma)
(5)
0
5
10
15
20
25
30
J
a
n

0
6
M
a
y

0
6
S
e
p

0
6
J
a
n

0
7
M
a
y

0
7
S
e
p

0
7
J
a
n

0
8
M
a
y

0
8
S
e
p

0
8
J
a
n

0
9
M
a
y

0
9
S
e
p

0
9
J
a
n

1
0
M
a
y

1
0
S
e
p

1
0
J
a
n

1
1
M
a
y

1
1
S
e
p

1
1
J
a
n

1
2
M
a
y

1
2
S
e
p

1
2
J
a
n

1
3
M
a
y

1
3
S
e
p

1
3
J
a
n

1
4
M
a
y

1
4
Mainland visitors Total tourist arrivals (% YoY, 12mma)
30
40
50
60
70
80
90
100
110
120
130
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
The end of a
boom
Mainland
arrivals slow
Still resilient
property



Weekly secondary market sales of 35 active residential real estates

Note: Weekly secondary market sales in 35 residential real estates monitored by Midland Realty.
Source: Midland Realty
Hong Kong banks' net external claims on banks in China

Note: External claims less liabilities. Source: HKMA
Renminbi deposits in Hong Kong

Source: Hong Kong Monetary Authority
0
100
200
300
400
500
600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(units)
(500)
0
500
1,000
1,500
2,000
2,500
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
(HK$bn)
0
1
2
3
4
5
6
7
8
9
10
11
12
13
0
100
200
300
400
500
600
700
800
900
1,000
1,100
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Renminbi deposits in Hong Kong
as % of total deposits in HK (RHS)
(Rmbbn) (%)
Bouncing off
the bottom
Surging
mainland
exposure . . .
. . . As renminbi
deposits have
risen

India: Gujarat model on national stage Asia Maxima


India: Gujarat model on national stage
The landslide victory of Narendra Modi last quarter has set up the prospect of a
dramatic change in the way government works in India. Modi plans to run his
chief-executive style of government through an A-team in the Prime Ministers
office with the individual ministers playing a secondary B-team role. This repeat
of the Gujarat autocratic model on the national stage has become possible
precisely because of the sweeping nature of Modis victory with the BJP securing
an outright majority with 282 parliamentary seats in the Lok Sabha.
Index movement

Source: Datastream
The focus on growth and development will define Modis term in government
just as it did his 12 years as chief minister in Gujarat where Modi succeeded
in generating not only a lot of investment but also the flourishing of the
agricultural sector by focusing on simple effective measures, such as
improving irrigation. But if the Gujarat success is by now well understood, it
is also the case that Modi has assumed power at a fortunate moment. For
there is a lot of evidence that the Indian economy was already bottoming out
after a three-year slowdown. Indeed, it could turn out that the overwhelming
electoral mandate won by Modi marked the final removal of uncertainty,
which will generate the confidence among businessmen to launch a new
investment cycle as animal spirits are rekindled. Certainly, with the BJP being
the first single party since 1984 to have an absolute majority in the lower
house of the parliament, this government should last the full five-year term.
True, an investment cycle is not only about a revival of confidence, though
psychology is a vital ingredient. It is also about balance sheets. Indian corporates
have gone through an extended deleveraging cycle, though there is still a legacy
problem in the banking system, in terms of not only Rs2.5tn of non-performing
loans but also Rs3.2tn of so-called restructured loans, most of which are in
state-owned banks. On this point, the new Indian leader will likely support a
reorganisation of the state-owned banks by creating incentives for management
to turn these enterprises into more entrepreneurial organisations.
But a new investment cycle in India has less to do with Modi. This is because
actions initiated by the last Congress government in its final year in office
have seemingly gone a long way to clearing the logjam in stalled investment
projects. The two key developments here were the establishment in
December 2012 of the Cabinet Committee on Investment (CCI) and the
Project Monitoring Group (PMG) established in June last year.
The purpose of these entities is to focus on clearing bottlenecks in the
investment process, most particularly where there are disputes between
ministries. The formation of the CCI was an acknowledgement of this
0
5,000
10,000
15,000
20,000
25,000
30,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
BSE Sensex 200-day moving average
Landslide victory
Focus on growth
and development



institutional problem. Since then about US$35bn of stalled investment
projects, more than half in the energy space, have been cleared. Since the
average length of these investments is about five years, this translates into
about US$7bn of investment a year. With the uncertainty of the election
lifted, there is no real reason why this investment should not proceed.
But the other reason for renewed optimism on the investment cycle relates,
not to stalled investments, but to the potential for new investments going
forward. The key innovation here is the digitisation of the process. For
example, the Ministry of Environment and Forests (MoEF) has agreed that all
applications as regards forest clearance be digitalised from 1 July. This is
important since 42% of the cases the PMG is handling relate to the forestry
and environment ministry. In total, the PMG is looking at 437 projects,
representing over US$300bn of investment, of which 150 projects worth
US$92bn have been cleared, with 76% of them in the power sector.
From a macroeconomic standpoint, it is certainly hard to exaggerate the
pent-up demand, given the investment slowdown in recent years. Thus, the
growth in value of investment projects under implementation has fallen from
54% YoY in 1Q07 to 3.5% YoY in 1Q14, while new project announcements as
a percentage of nominal GDP have plunged from 42% in FY08 to 3.5% in
FY14. This collapse in investment growth was mainly upstream in terms of
infrastructure and heavy industry. These are the areas which are now due to
rebound strongly with all the beneficial multiplier consequences.
Although the investment downturn has been real investment, measured as
gross capital formation including change in inventories, has still been around
34% of GDP in the last two years, despite hardly any investment in terms of
infrastructure and heavy industry. Meanwhile, investors do not have to worry
about the equivalent of Chinas much-discussed over-investment problem.
This makes India a virtuous self-fulfilling story when an investment cycle is
under way, with the resulting high growth mitigating its macroeconomic
weaknesses, such as chronically large fiscal deficits. Hopefully, Modi will
impose some much needed discipline here with the full FY15 budget due
around 11 July.
Another point is that it is not that evident that the investment cycle is so
interest-rate sensitive. This is important, since inflation remains sticky as a
result of the last governments food subsidies and make-work schemes.
Changes in these policies are more likely to be incremental than drastic. This is
why investors in Indian equities should not expect interest-rate cuts for the
moment. Meanwhile, though valuations have risen with the stock markets rally
this year, they are still at 10-year mean levels on a forward-earnings basis.
CLSA India universe trailing price-to-book

1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Digitalisation
of investment
approval process
Pent-up investment
demand



India April-May 2014 general election results

Source: Election Commission of India
India real GDP growth

Source: CEIC Data
India annualised gross fixed capital formation as % of nominal GDP

Source: CEIC Data
BJP
52%
BJP allies
10%
Congress
8%
Congress allies
3%
ADMK
7%
Others
20%
Total 543 seats
0
2
4
6
8
10
12
1997 1999 2001 2003 2005 2007 2009 2011 2013
(% YoY)
22
24
26
28
30
32
34
1997 1999 2001 2003 2005 2007 2009 2011 2013
(%, 4Qma)
The decisive
victory . . .
. . . Leads to
hopes that
growth has
bottomed . . .
. . . And that
investment has
bottomed



Cumulative FII net equity investment and BSE Sensex

Source: Bloomberg
BSE Sensex one-year forward P/E

Source: CLSA
India bank credit growth

Source: Bloomberg, RBI
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
0
30
60
90
120
150
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cumulative FII net equity investment
BSE Sensex (RHS)
(US$bn)
8
10
12
14
16
18
20
22
24
26
28
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
10Y average
8
10
12
14
16
18
20
22
24
26
28
30
J
a
n

0
8
A
p
r

0
8
J
u
l

0
8
O
c
t

0
8
J
a
n

0
9
A
p
r

0
9
J
u
l

0
9
O
c
t

0
9
J
a
n

1
0
A
p
r

1
0
J
u
l

1
0
O
c
t

1
0
J
a
n

1
1
A
p
r

1
1
J
u
l

1
1
O
c
t

1
1
J
a
n

1
2
A
p
r

1
2
J
u
l

1
2
O
c
t

1
2
J
a
n

1
3
A
p
r

1
3
J
u
l

1
3
O
c
t

1
3
J
a
n

1
4
A
p
r

1
4
(% YoY)
Foreigners keep
buying equities .
. .
. . . While
valuation not so
extended
Deleveraging

Indonesia: Close election race Asia Maxima


Indonesia: Close election race
It has all been about the pending presidential election during the past quarter.
The election, due to be held on 9 July, is looking like a very close contest. It is
certainly the most fiercely contested presidential campaign in the countrys
short post-Suharto democratic history.
Index movement

Source: Datastream
While stock-market favourite, Jakarta Governor Jokowi, is still leading in the
polls, his lead is down to only 3-7 percentage points over rival candidate
former general, Prabowo Subianto, based on some opinion polls conducted in
June. Thus, a poll conducted on 1-10 June by Lembaga Survei Indonesia
(LSI) shows Jokowi leads Prabowo by only three percentage points, with 19%
of the electorate still undecided. Still, Jokowis lead has been cut by about 20
percentage points since March. The word on the street in recent weeks is that
the momentum is with Prabowo as a result of superior organisation, greater
funding resources and a tough guy image, with a certain appeal among
poorer Indonesians, particularly in rural areas, yearning for a return to
Suharto-style iron fist rule.
The above is of relevance to investors since a Prabowo victory would likely be
negative for the stock market and the rupiah, both of which have certainly
not yet fully discounted such an outcome. Hopes raised by Jokowi that energy
subsidies will be phased out over a four-year period would diminish sharply
leaving less room in the budget for much-needed infrastructure spending.
Similarly, there would be less confidence that there will be long-overdue
reform of the oil and gas sector, where Indonesia is on course, on present
trends, to become a net importer of energy, including oil, gas and coal, by
2017. For more on this, read a CLSA research report published last quarter
(Energizers - How sector reform is essential for growth, 5 May 2014 by
deputy head of Indonesia research Jayden Vantarakis).
A Prabowo victory would also represent a continuation of the same old
establishment politics dominated by the same old elite. This is evident from
the divergent funding sources. Prabowo is relying on the usual methods, with
big funding from corporate interests, whereas Jokowi has simply published
bank accounts on the internet for individual supporters to pay money into,
seemingly refusing all corporate donations, which always infer a certain
reciprocal obligation.
With the election heating up, negative campaigning has also picked up, even
though the formal one-month campaign period only began on 4 June. Jokowi
has been portrayed in recent weeks by the opposition as a closet Christian
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Jakarta Composite 200-day moving average
Looming election
Opinion poll data
Market consequences of
Prabowo
Contrasting political style



and a puppet of PDI-P leader Megawati Soekarnoputri. While the Jakarta
governor has been reluctant to get dirty, some of his well-connected
supporters are fighting back. The former head of Indonesias State
Intelligence Agency, Abdullah Mahmud Hendropriyono, stated in public in June
that, as Prabowos former military superior, he had access to psychological
tests which showed Prabowo to be on the verge of schizophrenia.
So this current Indonesian election is very different from what just occurred
in India. Narendra Modis campaign was superbly organised, following a long
period of planning. The opposite is the case in Indonesia. Jokowi only formally
decided to go for the presidency in mid-March, and the organisational skills of
his political parity, PDI-P, leave something to be desired judging by the
disappointing outcome in Aprils parliamentary election. By contrast, Prabowo,
backed by his wealthy businessman brother Hashim Djojohadikusumo, has
been planning this campaign for years and is desperate to win the presidency.
Meanwhile, the other issue in Indonesia is that the countrys macroeconomic
problems may not be behind it. While last year saw 175bp of monetary
tightening and a 21% decline in the rupiah against the US dollar, the renewed
deterioration in the current-account deficit is a concern. The trade balance
swung from a US$669m surplus in March and a US$1.1bn surplus in 1Q14 to a
US$2bn deficit in April. It is also the case that aggregate credit growth remains
surprisingly strong, running at 18.5% YoY. Within this aggregate, corporate
lending remains robust running above 20% YoY, even though consumer-related
lending has slowed sharply in response to higher interest rates. Thus,
consumer loan growth has slowed from 50% YoY in 3Q12 to 10% YoY in April.
As a result total lending continues to grow well above nominal GDP, as it has
done for several years. Thus, bank loans rose by 18.5% YoY in April,
compared with 12% YoY nominal GDP growth in 1Q14. It is also not a positive
that the Ministry of Finance was recently forced to revise its 2014 budget. The
final approved budget revision calls for a Rp69tn or 21% increase in subsidy
payments (mainly from a 24% increase in energy subsidies). This will be
partly paid for by a 6% reduction in infrastructure spending. This is exactly
not what is needed.
If these are cyclical concerns, ultimately the structural challenges facing
Indonesia is that the origins of the boom in recent years was the surge in coal
and palm-oil exports on the back of the China commodity story. This has now
peaked. Going forward, new catalysts are required, be it a long overdue
upgrade of infrastructure and a related improvement in logistics, or be it oil
and gas reform.
CLSA Indonesia universe trailing price-to-book

0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Deteriorating trade data
Structural issue
Still strong credit growth



9 July Indonesian presidential election opinion poll

Note: Poll conducted on 1-10 June. Source: Lembaga Survei Indonesia (LSI)
Indonesia trade balance

Source: CEIC Data
Indonesia energy trade balance

Source: CLSA
Jokowi-JK
42%
Prabowo-Hatta
39%
Undecided
19%
(3)
(2)
(1)
0
1
2
3
4
J
a
n

1
0
A
p
r

1
0
J
u
l

1
0
O
c
t

1
0
J
a
n

1
1
A
p
r

1
1
J
u
l

1
1
O
c
t

1
1
J
a
n

1
2
A
p
r

1
2
J
u
l

1
2
O
c
t

1
2
J
a
n

1
3
A
p
r

1
3
J
u
l

1
3
O
c
t

1
3
J
a
n

1
4
A
p
r

1
4
(US$bn)
(50)
(40)
(30)
(20)
(10)
0
10
20
30
40
50
0
3
0
4
0
5
0
6
0
7
0
8
0
9
1
0
1
1
1
2
1
3
1
4
C
L
1
5
C
L
1
6
C
L
1
7
C
L
1
8
C
L
(US$bn)
Oil Gas Coal Energy trade balance
The election
race is close . . .
While the trade
balance is still
not healthy . . .
. . . As energy
fundamentals
deteriorate



Indonesia bank credit growth and nominal GDP growth

Source: CEIC Data
Indonesia consumer loan growth

Source: Bank Indonesia, CLSA
Indonesia annualised palm oil and coal exports in US$ terms

Source: Bank Indonesia
0
5
10
15
20
25
30
35
40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Indonesia bank credit growth Nominal GDP growth
(% YoY)
0
5
10
15
20
25
30
35
40
45
50
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
1
Q
1
2
2
Q
1
2
3
Q
1
2
4
Q
1
2
1
Q
1
3
2
Q
1
3
3
Q
1
3
4
Q
1
3
1
Q
1
4
A
p
r
1
4
(% YoY)
0
5
10
15
20
25
30
35
3
5
7
9
11
13
15
17
19
21
J
a
n

0
6
M
a
y

0
6
S
e
p

0
6
J
a
n

0
7
M
a
y

0
7
S
e
p

0
7
J
a
n

0
8
M
a
y

0
8
S
e
p

0
8
J
a
n

0
9
M
a
y

0
9
S
e
p

0
9
J
a
n

1
0
M
a
y

1
0
S
e
p

1
0
J
a
n

1
1
M
a
y

1
1
S
e
p

1
1
J
a
n

1
2
M
a
y

1
2
S
e
p

1
2
J
a
n

1
3
M
a
y

1
3
S
e
p

1
3
J
a
n

1
4
Palm oil exports
Coal exports (RHS)
(US$bn, annualised) (US$bn, annualised)
Aggregate credit
growth has not
slowed much . . .
. . . But
consumer credit
growth has
slowed more
The end of the
commodity
boom

Korea: Growing pressure to ease Asia Maxima


Korea: Growing pressure to ease
One institution that will be relieved if Japan gets out of deflation in a healthy
manner will be the Bank of Korea. For in a world of competitive devaluation,
the won continues to behave like the emerging-market equivalent of the
euro given Koreas continuing macro characteristics of a rising current-
account surplus, a low fiscal deficit, a normalised yield curve and a subdued
credit cycle.
Thus, the won appreciated by 5% against the US dollar and 3% against the
yen last quarter. While its annualised current account surplus has risen from
1% of GDP in late 2011 to 6.5% in May. The consolidated fiscal account,
excluding social security funds, recorded a deficit of 1.5% of GDP in 2013.
While the 10-year government bond yield is now 55bps above the overnight
call rate and 49bps above the three-year government bond yield. As for the
credit cycle, bank loan growth is running at 6.3% YoY compared with nominal
GDP growth of 5% YoY.
Index movement

Source: Datastream
The new Bank of Korea governor, Juyeol Lee, did not cut rates last quarter.
But there must be a growing temptation to do so given the continuing low
level of inflation and given a flattening yield curve in recent months. CPI rose
by 1.7% YoY in May, up from 1.5% YoY in April. But this remains well below
the BoKs inflation target range of 2.5-3.5% for 2014. The 10-year
government bond yield has fallen by 58bps from a recent high of 3.75%
reached in early December 2013 to 3.17% at the end of June.
Still, with the continuing won strength, and a real risk of a currency
overshoot, the Bank of Korea will at some point be forced to ease
aggressively in an environment where the Bank of Japan does another
episode of QE. Indeed, Korea may even panic and become the first emerging-
market central bank to venture into its own unorthodox monetary policy.
True, no one is thinking about this at the moment. But what is evident is that
Korean export data so far this year have not confirmed consensus
expectations at the start of 2014 of a significant pickup. Thus, Korean exports
fell by 1% YoY in May and were up only 2.6% YoY in the first five months of
this year. This has global implications given there is an 85% correlation
between Korean export data and global exports.
0
500
1,000
1,500
2,000
2,500
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Kospi 200-day moving average
Flattening yield curve
Weak export growth
Safe haven won



The continuing lack of a strong export recovery has not impacted the current-
account surplus, and therefore the won, because of weak imports. Imports
rose by only 2.3% YoY in the first five months of this year. As a result, the
trade surplus increased by 7% YoY to US$15bn over the same period.
Meanwhile, from a stock-market perspective, earnings have continued to
disappoint supporting the relative lack of enthusiasm for Korean stocks shown
so far this year by foreign investor buying compared with some other Asian
stock markets. Thus, foreigners sold a net 3.5tn won of Kospi stocks in 1Q14
but have since bought a net 5.7tn won in the second quarter. The 1Q14
earnings came in up only 2.7% YoY or 17% below consensus expectations.
CLSAs Seoul office is forecasting 11% earnings growth this year on a top-
down basis and 20% based on analyst forecasts.
Amid the relatively lacklustre outlook, housing and construction-related
sectors have enjoyed a certain momentum as the current government has
moderated some of the long-running anti-speculative measures. But the
property market has corrected over the past three months following the
governments announcement in February of its rental income tax
enforcement plan which will tax property owners who rent out their
apartments. Thus, Seoul apartment transaction volume declined by 17.7%
YoY in May. While Seoul apartment prices have turned negative, falling by
0.28% since mid-April.
The relative buoyancy of the construction sector was clear from 1Q14 GDP
data where construction was the key investment driver. Thus, real
construction investment rose by an annualised 22% QoQ in 1Q14, while
facilities investment declined by an annualised 7.3%. By contrast, real private
consumption growth slowed for the second consecutive quarter to only an
annualised 0.7% in 1Q14. Loan growth also remains tepid though, as already
noted, slightly above nominal GDP growth.
CLSA Korea universe trailing price-to-book


0.7
0.9
1.1
1.3
1.5
1.7
1.9
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Weak earnings growth
Property data
Construction pick-up



Korean won/yen exchange rate (inverted scale)

Source: Bloomberg
Korea annualised current account balance as % of GDP

Source: CEIC Data
Korea export growth

Source: CEIC Data
7
8
9
10
11
12
13
14
15
16
17
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
(1)
0
1
2
3
4
5
6
7
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
(% GDP)
(40)
(30)
(20)
(10)
0
10
20
30
40
50
2008 2009 2010 2011 2012 2013 2014
(% YoY)
Rising won . . .
. . . On back of
rising current
account surplus
A lack of export
growth



Cumulative foreign net buying of Kospi stocks

Source: CEIC Data, Korea Stock Exchange
Korea bank loan growth and nominal GDP growth

Source: CEIC Data
Korea 10Y government bond yield and Bank of Korea policy rate

Source: Bloomberg
300
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
(60)
(50)
(40)
(30)
(20)
(10)
0
10
20
30
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cumulative net buying of Kospi stocks by foreigners
Kospi (RHS)
(tn won)
0
5
10
15
20
25
30
35
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Nominal GDP growth Bank loan growth
(% YoY)
1
2
3
4
5
6
7
8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Korea 10-year government bond yield
BoK base rate (7-day repo)
(%)
No massive
foreign buying
Continuing
subdued credit
growth
Flattening yield
curve

Malaysia: More macro than micro Asia Maxima


Malaysia: More macro than micro
The macroeconomic data continues to record robust growth. Real GDP growth
accelerated in the first quarter, driven primarily by public sector-related
investment while consumption growth remained robust.
Thus, real GDP rose by 6.2% YoY in 1Q14, up from 5.1% YoY in 4Q13. This is
the strongest growth since 4Q12. Real gross fixed-capital formation rose by
6.3% YoY in 1Q14, and was up an annualised 12.4% QoQ. While real private
consumption rose by 7.1% YoY, down slightly from 7.4% YoY in 4Q13. Export
growth also picked up leading to an improving current account surplus.
Exports rose by 18.9% YoY in ringgit terms and 11.3% YoY in US dollar terms
in April, the strongest growth since October 2011. As a result, the current-
account surplus rose from US$4.6bn or 5.6% of GDP in 4Q13 to US$6bn or
7.7% of GDP in 1Q14.
The fiscal position has also improved with rising revenues. The fiscal deficit
fell to a six-year low of 3.9% of GDP in 2013, down from 4.5% in 2012 and a
recent high of 6.7% in 2009. The governments target is to reduce the fiscal
deficit further to 3.5% of GDP this year and 3% in 2015. Federal government
revenues rose by 10.6% YoY in the first four months of this year.
The only potential negative is a pickup in inflation to an average of 3.4% YoY
in the first five months of this year, up from 1.6% in the same period last
year, which is the natural consequence of the removal in subsides since last
September. Still CPI inflation eased for the second consecutive month in May,
edging down from 3.5% YoY in March to a five month low of 3.2% YoY in May.
CLSAs economics team expects Bank Negara Malaysia (BNM) to continue to
hold rates steady in its 10 July policy meeting. But a 25bps hike in each of
the two policy meetings in September and November is forecast, as inflation
will trend higher as more subsidy cuts come through. These would be the first
rate hikes since May 2011, lifting the policy rate from the current 3% to 3.5%
by the end of 2014.
Index movement

Source: Datastream
If this is the macro picture, the micro picture is less appealing, driven by a
lack of exciting bottom-up options and relatively high valuations. Malaysia
continues to trade at a premium valuation to the region with these valuations
supported by buying from government-related institutions. CLSAs universe of
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
KLCI 200-day moving average
Robust data
Fiscal improvement
Stock market valuations



47 Malaysian stocks under coverage trades at 17x 2014 forecast earnings,
assuming 6.8% earnings growth, the second highest valuation in Asia after
the Philippines. This compares with a 12x 2014 PE for the region.
As for foreign investors, they have been relatively inactive year to date.
Foreigners sold a net RM6bn worth of Malaysian stocks in 1Q14 though they
bought back a net 4.2bn in 2Q14. This compared with net selling of RM11.5bn
in 2H13. By contrast, foreigners remain big holders of Malaysian government
bonds which currently yield 4.0%. Foreigners owned 46% of outstanding
Malaysian government bonds at the end of May, compared with foreign
ownership of 23% in Malaysian stocks. This bond yield compares with a
forecast average 2014 dividend yield of 3.0% for CLSAs Malaysia equity
universe. This same universe has a forecast ROE of 14% for 2014.
If the overall picture in terms of data looks relatively benign, the more
insidious and troubling side to the Malaysia story was revealed in a thematic
research report published by CLSAs Kuala Lumpur office last quarter (Mr &
Mrs Malaysia 2014, 5 May 2014). The survey of 2,500 families, conducted
during February and March this year, reveals sharply contrasting attitudes
between the races. The majority of Malays feel better off, while the minority
Chinese, an estimated 24% of the population, are deeply negative. This
reflects the reality that government support, from cash transfers to
continuing affirmative action schemes, supports the Malays while the Chinese
are deterred from much needed private investment by the continued
existence of such schemes. It is also the case that the Chinese community is
feeling more vulnerable, having supported the opposition heavily in the last
general election held in May 2013. The survey results show that 53% of
Chinese expect their financial position to worsen over next year, compared
with only 37% of Malays. While 74% of Chinese fear the economy will
deteriorate in the coming year.
The result is that the race is the key factor driving attitudes which, while not
surprising, is also not healthy. The issue now is whether Prime Minister Najib
Razak will use his strong position, in terms of his personal polling support
running well ahead of UMNOs, to pursue a more reform orientated agenda,
given that another general election does not have to be held until 2017. But
so far the record on this is mixed.
CLSA Malaysia universe trailing price-to-book

1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Mr & Mrs Malaysia
Race driven



Malaysia real GDP, consumption and investment

Source: CEIC Data
Malaysia export growth

Source: CEIC Data
Malaysia current account balance

Source: CEIC Data, Bank Negara Malaysia
90
110
130
150
170
190
210
M
a
r

0
5
J
u
n

0
5
S
e
p

0
5
D
e
c

0
5
M
a
r

0
6
J
u
n

0
6
S
e
p

0
6
D
e
c

0
6
M
a
r

0
7
J
u
n

0
7
S
e
p

0
7
D
e
c

0
7
M
a
r

0
8
J
u
n

0
8
S
e
p

0
8
D
e
c

0
8
M
a
r

0
9
J
u
n

0
9
S
e
p

0
9
D
e
c

0
9
M
a
r

1
0
J
u
n

1
0
S
e
p

1
0
D
e
c

1
0
M
a
r

1
1
J
u
n

1
1
S
e
p

1
1
D
e
c

1
1
M
a
r

1
2
J
u
n

1
2
S
e
p

1
2
D
e
c

1
2
M
a
r

1
3
J
u
n

1
3
S
e
p

1
3
D
e
c

1
3
M
a
r

1
4
Real GDP
Real gross fixed capital formation
Real private consumption
(1Q05=100, sea. adj.)
(15)
(10)
(5)
0
5
10
15
20
25
J
a
n

1
1
M
a
r

1
1
M
a
y

1
1
J
u
l

1
1
S
e
p

1
1
N
o
v

1
1
J
a
n

1
2
M
a
r

1
2
M
a
y

1
2
J
u
l

1
2
S
e
p

1
2
N
o
v

1
2
J
a
n

1
3
M
a
r

1
3
M
a
y

1
3
J
u
l

1
3
S
e
p

1
3
N
o
v

1
3
J
a
n

1
4
M
a
r

1
4
M
a
y

1
4
(% YoY)
0
5
10
15
20
25
0
2
4
6
8
10
12
14
M
a
r

9
8
S
e
p

9
8
M
a
r

9
9
S
e
p

9
9
M
a
r

0
0
S
e
p

0
0
M
a
r

0
1
S
e
p

0
1
M
a
r

0
2
S
e
p

0
2
M
a
r

0
3
S
e
p

0
3
M
a
r

0
4
S
e
p

0
4
M
a
r

0
5
S
e
p

0
5
M
a
r

0
6
S
e
p

0
6
M
a
r

0
7
S
e
p

0
7
M
a
r

0
8
S
e
p

0
8
M
a
r

0
9
S
e
p

0
9
M
a
r

1
0
S
e
p

1
0
M
a
r

1
1
S
e
p

1
1
M
a
r

1
2
S
e
p

1
2
M
a
r

1
3
S
e
p

1
3
M
a
r

1
4
(US$bn)
Malaysia current account balance
as % of nominal GDP (RHS)
(% GDP)
Strong macro
Strong exports
Improving
current account



Malaysia fiscal deficit as % of GDP

Note: Government Budget/target for 2014 and 2015. Source: Ministry of Finance Malaysia
Bank Negara overnight policy rate and CPI inflation

Source: CEIC Data, Bank Negara Malaysia
Cumulative foreign net buying of Malaysian stocks and KLCI

Source: CLSA, The Sun Daily, Bursa Malaysia
0
1
2
3
4
5
6
7
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
2
0
1
5
E
(% GDP)
(4)
(2)
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Bank Negara Malaysia overnight policy rate
Malaysia CPI inflation (%YoY)
(%)
1,500
1,550
1,600
1,650
1,700
1,750
1,800
1,850
1,900
0
5
10
15
20
25
30
35
40
J
a
n

1
2
F
e
b

1
2
M
a
r

1
2
A
p
r

1
2
M
a
y

1
2
J
u
n

1
2
J
u
l

1
2
A
u
g

1
2
S
e
p

1
2
O
c
t

1
2
N
o
v

1
2
D
e
c

1
2
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
J
u
l

1
4
(RMbn)
Cumulative foreign net buying of Malaysian stocks
KLCI (RHS)
Improving fiscal
Stable interest
rates
But no rush to
buy by
foreigners

Philippines: Macro positives Asia Maxima


Philippines: Macro positives
The Philippines continues to enjoy one of the strongest (if not the strongest),
domestic momentum stories in Asia, driven by ongoing remittances, the
booming BPO sector and growing evidence of an infrastructure cycle. Cash
remittances from overseas Filipinos grew by 5.8% YoY in US dollar terms to
US$7.4bn in the first four months of this year, and were up 16.1% YoY in peso
terms. While BPO revenues at US$15.5bn amounted to 67% of remittances in
2013, and are projected by the Business Process Association of the Philippines
(BPAP) to reach US$18bn this year and US$25bn by 2016. This means that
remittances and BPO revenues between them accounted for 14% of nominal
GDP last year, representing the prime driver of the domestic demand story.
Index movement

Source: Datastream
Still, there also continues to be growing evidence of an investment cycle in
terms of the reported GDP data. Thus, annualised gross fixed capital
formation as a percentage of nominal GDP has risen from a low of 18.6% in
1Q12 to 20.6% in 1Q14, the highest level since 2Q04. Importantly, the past
quarter has also seen some progress on President Benigno Aquinos Public-
Private Partnership (PPP) programme. Thus, the government held two
successful bids in June for the P65bn LTR-1 Cavite Extension and the P35bn
Cavite-Laguna Expressway. The first project is a 11.7km extension to an
existing railway and the second is a new 47km highway.
This means there are now six more PPP projects with P69bn left to secure
bids, based on the governments target. The PPP Center said in December
that at least 15 PPP projects will be awarded before Aquinos term ends in
June 2016, including seven completed projects. The presidential election is
due to be held in May 2016.
If the election is perhaps the major medium risk, it is still two years away
and therefore too early to become a consideration for stock market
investors, most particularly as there is a lack of clarity on who the
candidates will be. This means the major issues facing the stock market
remain relatively high valuation and the potential, at least, for some
marginal interest rate hikes. CLSAs economics team is forecasting 50bp
of tightening this year from 3.5% to 4%. Still the Bangko Sentral ng
Pilipinas (BSP) has so far held its key policy rate at 3.5%, though it has
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
PSEi 200-day moving average
Remittance and BPO data
Investment cycle
evidence
PPP progress
Monetary policy



raised reserve requirements by 200bp to 20% since late March and
increased the interest rate on the Special Deposit Account (SDA) facility by
25bp to 2.25% in June.
From a valuation standpoint the CLSA universe of 44 Philippine stocks
under coverage trades at 19x forecast 2014 earnings and 16.5x forecast
2015 earnings assuming 4.6% and 14.8% earnings growth respectively.
These relatively lofty valuations clearly create scope for a correction, most
particularly if there is a monetary tightening scare. Yet, with headline CPI
inflation at only 4.5% YoY and with a continuing strong current account
surplus still running at 3.1% of GDP based on the latest data, any interest-
rate increases, if they happen, will only be marginal. In this respect,
perhaps the biggest risk, as with other interest-rate sensitive Asian stock
markets, is an externally driven tightening scare similar to last summers
tapering tantrum; when foreigners sold a net US$1.3bn worth of
Philippine stocks between late September 2013 and early February. Since
then, they have bought a net US$1.2bn between early February and the
end of last quarter.
Finally, another positive macro signal is growing evidence of accelerating
credit growth. This rose to 21.1% YoY at the end of May, up from 16.4% YoY
at the end of 2013. This rising credit growth trend is the result of growing
pressure on the Philippines long-conservative banks to lend, a pressure
caused by the gradual unwind of the central banks Special Deposit Accounts,
which have fallen from a peak of P1.9tn at the end of February 2013 to
P1.1tn at the end of May. This has caused the loan-to-deposit ratio of the
banking system to fall to only 62%.
The economy is, therefore, posed for accelerating credit growth at a time
when NPLs are at a near record low of 2.2% and corporate leverage has
declined to only 21%. Meanwhile, for now at least, credit continues to be
extended across a broad range of sectors. Bank loans for real estate, utilities,
the wholesale and retail trade and the manufacturing sector rose by 18%,
36.5%, 23% and 15.8% YoY respectively in May.
CLSA Philippines universe trailing price-to-book

0.6
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
3.3
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Credit growth



Philippines ratio of BPO revenues to remittances

Source: CLSA, BSP, BPAP
Philippines annualised gross fixed capital formation as % of nominal GDP

Source: CEIC Data
Cumulative foreign net buying of Philippine stocks

Source: Bloomberg
0
10
20
30
40
50
60
70
80
0
5
10
15
20
25
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
BPO revenues (LHS)
Overseas remittances (LHS)
BPO revenues / remittances
(US$bn) (%)
18
19
20
21
22
23
24
25
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
(% GDP)
(1)
0
1
2
3
4
5
6
7
8
9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(US$bn)
The continuing
domestic-
demand drivers
An accelerating
investment
cycle
Foreigners turn
buyer again . . .



Philippines bank loan growth

Note: Net of banks reverse repurchase transactions with the BSP. Source: CEIC Data, BSP
Philippines banking sector loan-to-deposit ratio

Note: Universal and commercial banks since 1999. Commercial banks prior to 1999. Source: CEIC Data, BSP
Philippines CPI inflation

Source: CEIC Data, Bangko Sentral ng Pilipinas (BSP)
(10)
0
10
20
30
40
50
60
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
(% YoY)
50
60
70
80
90
100
110
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
(%)
1
2
3
4
5
6
7
8
9
10
11
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(%) Core CPI inflation Headline CPI inflation
. . . As credit
growth
accelerates . . .
. . . As a
consequence of
an increased
capacity to lend
Inflation rises
from record low
levels

Singapore: Affordability issue Asia Maxima


Singapore: Affordability issue
There are growing signs that Singapores long-running tourist boom has
peaked out. Retail sales value, excluding autos, declined by 1.5% MoM in
April on a seasonally adjusted basis and was down 1.3% YoY. While perhaps
more significantly, total retail spending contracted 9% YoY in April.
Index movement

Source: Datastream
The evidence suggests that the weakness in retail spending is stemming from
tourism-related segments whereas domestic household consumption is
underpinned by wage increase in what remains a tight labour market. Average
monthly earnings rose by 3.2% YoY in 1Q14, following a 4.3% YoY increase in
2013. While total visitor arrivals declined by 5.2% YoY in April, the biggest fall
since June 2009, and were flat in 1Q14. This follows 7% growth in 2013.
There are two main reasons for the decline in tourism. First, Singapore has
become expensive. This is primarily because of the sharp appreciation of the
Singapore dollar against other regional currencies in recent years. The
Singapore dollar has appreciated against the ringgit, rupee, rupiah, baht,
renminbi and yen by 6%, 45%, 35%, 10%, 5% and 22% respectively over
the past five years. This makes Singapore increasingly too expensive to
tourists from the region. Services-sector inflation is also an issue, even
though it edged down from 2.7% YoY in April to 2.5% YoY in May.
The second reason is a trend similar to that experienced in Hong Kong,
namely fewer visitor arrivals from China. Tourist arrivals from China, which
accounted for 14% of total tourist arrivals in 1Q14, declined by 19.5% YoY in
March and are down 14% YoY in 1Q14.
The overall result is that while total visitor arrivals are still growing
marginally, per-capita spending by tourists is declining. Tourism receipts per
capita have fallen by 11% over the past two year to a four-year low of
S$1,510 in 2013. The Singapore Tourism Board (STB) estimates visitor
arrivals to rise to 16.3-16.8m this year from 15.6m in 2013, with tourism
receipts rising from S$23.5bn in 2013 to S$23.8-24.6bn. This implies a
further decline in per-capita tourism receipts to S$1460 this year.
The above is interesting since it is reflective of a boom that has peaked.
Moreover, it is hard to see what could happen to suddenly make Singapore
better value barring an unlikely collapse of the currency. Certainly the
governments growing focus on restricting the inflow of foreign labour is only
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Straits Times Index 200-day moving average
Tourism slows
Expensive currency
Tourist data



adding to costs in terms of wage pressures and the like. Meanwhile, it is
worth noting that the average cost of a hotel room in Singapore is now
S$260, up from S$120 in 2004.
Meanwhile, the same picture of a boom that has peaked out and is now in
correction mode is apparent from the residential market, where eight rounds
of property tightening since September 2009 have finally succeeded in cooling
speculative activity. True, primary sales excluding executive condominiums
(ECs) rebounded 97% MoM to 1,470 units in May, the highest monthly
volume since last June. But the fundamental problem remains that the
government is unlikely to relax materially its property tightening measures
unless there is a material correction in residential property prices.
So far this has not really happened. The private residential property price
index declined by only 1.3% QoQ and 0.8% YoY in 1Q14. Home prices in both
the core central region (high-end) and the rest of central region declined by
3.6% YoY in 1Q14, while prices in the outside central region (mass market)
rose by 5% YoY.
Meanwhile, there is still a pending surge in supply, most particularly in the
mass residential market, which is not due to peak out until 2016. Thus, total
private residential property completions are expected to rise from 13,024
units in 2Q-4Q14 to a peak of 26,252 units in 2016, with completions in the
outside core region rising from 4,940 units to 15,845 units over the same
period. For such reasons CLSAs Singapore property analyst Yew Kiang Wong
forecasts a 5-10% decline in physical residential property prices this year.
The same evidence of a boom that has peaked out is evident in declining
credit growth. Consumer lending is forecast to grow by less than 4% this
year, which would be the slowest growth since 1Q07. Within this aggregate,
both auto loans and mortgage loans were weak. Thus, car loans declined by
19.7% YoY in May, while mortgage loan growth has slowed to 7.3% YoY in
April and 7.6% YoY in May, the slowest growth since June 2007.
From a stock-market standpoint, the Singapore market remains most
attractive for its dividend plays and for the availability of regional proxies. The
CLSA universe of 47 Singapore stocks under coverage trades at 14x 14CL
earnings with a forecast ROE of 10%. This is the third-lowest forecast ROE in
the region after Japan and Hong Kong. Meanwhile, CLSAs Singapore dividend
cocktail portfolio, which has a forecast dividend yield this year of 4.8%, has
outperformed the benchmark MSCI Singapore Index by 39% since inception
in July 2010 and also outperformed by 2% year to date.
CLSA Singapore universe trailing price-to-book

0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Slowing credit growth
Property data



Singapore retail sales growth

Source: CEIC Data
Growth in Singapore tourist arrivals

Source: CEIC Data, Singapore Tourism Board
Singapore per capita tourism receipt

Source: STB, CEIC Data, CLSA
(15)
(10)
(5)
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(% YoY, 3mma)
(20)
(10)
0
10
20
30
40
2006 2007 2008 2009 2010 2011 2012 2013 1Q14
(% YoY)
Total From China
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
E
(S$)
Slowing . . .
. . . Also slowing
Peaking out



Singapore residential property price %YoY growth by segment

Source: URA
Singapore pending private residential supply (under construction + planned)

Note: Excluding Executive Condominiums. Source: CLSA, Urban Redevelopment Authority
Singapore business and consumer loan growth vs nominal GDP growth

Source: CEIC Data, MAS
(40)
(30)
(20)
(10)
0
10
20
30
40
50
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Core Central Region Rest of Central Region
Outside Central Region
(% YoY)
0
4,000
8,000
12,000
16,000
20,000
24,000
28,000
2-4Q14 2015 2016 2017 2018 >2018
(unit) Core Central Region
Rest of Central Region
Outside Central Region
(10)
0
10
20
30
40
50
J
a
n

0
6
M
a
y

0
6
S
e
p

0
6
J
a
n

0
7
M
a
y

0
7
S
e
p

0
7
J
a
n

0
8
M
a
y

0
8
S
e
p

0
8
J
a
n

0
9
M
a
y

0
9
S
e
p

0
9
J
a
n

1
0
M
a
y

1
0
S
e
p

1
0
J
a
n

1
1
M
a
y

1
1
S
e
p

1
1
J
a
n

1
2
M
a
y

1
2
S
e
p

1
2
J
a
n

1
3
M
a
y

1
3
S
e
p

1
3
J
a
n

1
4
M
a
y

1
4
(% YoY)
Business loans
Consumer loans
Nominal GDP growth
Property prices
are poised to
fall . . .
. . . As supply
builds . . .
. . . And as credit
growth slows

Taiwan: Technology driven Asia Maxima


Taiwan: Technology driven
The Taiwan equity-investment story has continued to be driven primarily by
the profitability of the tech sector supplying components for the smartphone
boom and other electronic niche-products globally. Tech earnings were up
26% YoY in the first quarter with growth driven mainly by gross-margin
expansion. By contrast, earnings for non-tech sectors, excluding financials,
were down 18% YoY.
Index movement

Source: Datastream
The tech sector also continues to attract foreign investors because of better
balance sheets and strong dividend support. The 48 tech stocks covered by
CLSAs Taiwan office had a 12% net cash to equity ratio in 2013 and have a
forecast dividend yield of 3.1% this year, which compares favourably with the
yield on the 10-year Taiwan government bond of only 1.6%. From a valuation
perspective, Taiwan tech stocks remain in line with the history. CLSAs Taiwan
tech universe trades on 2.2x trailing price to book and 15x trailing PE,
compared with a 10-year average of 2.3x and 14.4x respectively.
As a result, foreigners have remained net buyers of Taiwan equities year-to-
date, with last quarter seeing some rotation into more commoditised
downstream names. Foreigners bought a net NT$205bn worth of Taiex
stocks last quarter following net NT$79bn buying in 1Q14. The tech sector
has also been helped of late by currency movements. In particular, the NT
dollars 12% depreciation relative to the Korean won since late June 2013 has
allowed Taiwan to take back market share from Korea.
The result of all of the above is that perhaps the main risk is that all the
good news is in the price from a tech sector standpoint, with the sector
now comprising 58% of the MSCI Taiwan Index. The obvious positive
argument is accelerating end demand based on stronger recoveries in
America and Europe. But this remains for now more a hope than a reality,
with aggregate export growth barely rising year to date, though within
that aggregate electronics exports have done better. Thus, total exports
rose by only 2.1% YoY in the first five months of this year, while
electronics exports rose by 12.9% YoY.
From a domestic-demand standpoint, the strong profits enjoyed by the
technology sector have led to some pickup in sentiment, with consumer
confidence now at a record high. Thus, the Taiwan consumer-confidence index
rose by 1.99 points to 87.58 in June, the highest level since the survey began
in 2001. Still this has not yet translated into a significant pickup in credit
growth. System loans rose by 5.3% YoY in May, up from 5.0% YoY in April.
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Taiex 200-day moving average
Tech earnings
Tech sectors valuation
Foreign buying data
Export data



Meanwhile, the main potential catalyst for Taiwans domestic story remains
continuing expectations that the services pact, a part of the Economic
Cooperation Framework Agreement (ECFA), will be passed by the Taiwan
legislature prior to the end of the current quarter (3Q14). This is still likely
even though the pact has been held up in the Legislative Yuan disappointing
hopes that it would be passed by the end of the last quarter (ie 2Q14).
Opinion polls continue to show support for the services pact running at 60%.
While the services pact is a bilateral one the proposed deal is much more
interesting to Taiwanese companies, as they will get easier access to Chinas
much bigger market. CLSAs Taiwan office believes that the three main quoted
sectors to benefit will be banks, brokers and retailers. Most particularly, the
banks are being given greater freedom to operate in southern China. Thus,
Taiwanese banks and brokers will be able to operate under more liberalised
rules in terms of opening up branches in central and southern China. The
liberalisation of financial services under the agreement includes approving
Taiwan banks setting up village and township banks and providing renminbi
business to Taiwan entrepreneurs who invest in China from a third place.
It is important that the services pact is implemented by the end of the
summer legislative session before attention turns to Taiwans domestic-
election cycle. The routine legislative session ended on 31 May, with an extra
session due to conclude on 4 July. But another session can be called, which
will usually be in August, if the major bills fail to pass during the first extra
meeting. While a presidential election is not due until January 2016,
important local elections are scheduled for the end of this year. The so-called
seven-in-one municipal elections will be held on 29 November for all
directly-elected local-government positions, including the mayors of Taipei
and other five special municipalities.
Meanwhile, the initial key liberalisation re cross-Strait and financial services
occurred with the setting up of a renminbi offshore market in February 2013.
Renminbi deposits in Taiwan rose by Rmb2.5bn in May to Rmb290bn at the end
of May, or 3.9% of total Taiwan system deposits. This monthly increase is down
from the peak increase of Rmb32.5bn in February, prior to the PBOCs
depreciation move in March. This renminbi depreciation prompted the Financial
Supervisory Commission (FSC), the financial regulator, to tighten controls on
Taiwan banks selling so-called target redemption forwards (TRFs), where the
most popular product sold had been betting on renminbi appreciation. The FSC
said in May that sales of TRFs are required to be approved by a banks board of
directors before the product is launched. Banks should also introduce a stop-loss
mechanism allowing customers to exit the investment contract. Renminbi-linked
TRFs are estimated by the FSC at around NT$150bn.
CLSA Taiwan universe trailing price-to-book

1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
ECFAs services pact
Election cycle
Renminbi offshore market



Taiex Electronics Index relative to MSCI AC Asia Pacific ex-Japan

Source: Datastream
Cumulative foreign net buying of Taiex stocks

Source: CEIC Data, Taiwan Stock Exchange
Taiwan total export growth and electronics exports

Source: CEIC Data
90
95
100
105
110
115
120
125
130
J
a
n

0
9
A
p
r

0
9
J
u
l

0
9
O
c
t

0
9
J
a
n

1
0
A
p
r

1
0
J
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l

1
0
O
c
t

1
0
J
a
n

1
1
A
p
r

1
1
J
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l

1
1
O
c
t

1
1
J
a
n

1
2
A
p
r

1
2
J
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l

1
2
O
c
t

1
2
J
a
n

1
3
A
p
r

1
3
J
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l

1
3
O
c
t

1
3
J
a
n

1
4
A
p
r

1
4
J
u
l

1
4
(1/1/09=100)
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
(500)
(400)
(300)
(200)
(100)
0
100
200
300
400
500
600
700
800
2007 2008 2009 2010 2011 2012 2013 2014
Cumulative foreign net buying of Taiex stocks
Taiex (RHS)
(NT$bn)
(40)
(20)
0
20
40
60
80
J
a
n

0
7
M
a
y

0
7
S
e
p

0
7
J
a
n

0
8
M
a
y

0
8
S
e
p

0
8
J
a
n

0
9
M
a
y

0
9
S
e
p

0
9
J
a
n

1
0
M
a
y

1
0
S
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p

1
0
J
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1
1
M
a
y

1
1
S
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p

1
1
J
a
n

1
2
M
a
y

1
2
S
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p

1
2
J
a
n

1
3
M
a
y

1
3
S
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p

1
3
J
a
n

1
4
M
a
y

1
4
(% YoY, 3mma) Taiwan total export growth Electronics exports
A tech-driven
market . . .
. . . As foreigners
keep buying
A continuing
lack of export
growth in
aggregate



Taiwan consumer confidence index

Source: CEIC Data
Taiwan system loan growth

Source: CEIC Data
Renminbi deposits in Taiwan

Source: Central Bank of Taiwan, CLSA
45
50
55
60
65
70
75
80
85
90
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(point)
(5)
0
5
10
15
20
25
30
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
(% YoY)
0
50
100
150
200
250
300
0
5
10
15
20
25
30
35
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
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c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
(Rmbbn) Monthly increase Outstanding (RHS) (Rmbbn)
Consumers are
more confident .
. .
. . . As loan
growth stirs
Off the boil

Thailand: After the coup Asia Maxima


Thailand: After the coup
The past quarter saw the political impasse brought to an, at least, temporary
end by the announcement of a coup in May with Army head General Prayuth
Chan-ocha taking over and the appointment of a technocratic group of
advisors. The working plan is for a general election to be held around October
next year but this has certainly not been confirmed.
Index movement

Source: Datastream
The coup has been met with a remarkable lack of street violence, in terms of
protests and the like, suggesting it was well planned. The military was also
quick to state it will start paying Bt92bn of debts owed to rice farmers, as well
as to implement some of the former Yingluck governments infrastructure
projects, which had been stalled by the courts. This suggests growth should
accelerate from the second half of this year. Thai real GDP contracted by
0.6% YoY in 1Q14, with private consumption and gross fixed-capital
formation declining by 3% YoY and 9.8% YoY, respectively.
The probability for now is that the military will be successful in restoring a
degree of temporary stability in the, at least, 16-month period that is likely to
ensue before there is another poll. This is despite the fact that recent events
have done nothing to resolve the fundamental divisions in Thai society, as
reflected in the red shirt/yellow shirt divide. It should be noted that General
Prayuth has full legislative and administrative power for now. The plan is to
set up a National Legislative Assembly (NLA) selected directly by the military
junta, a cabinet and National Reform Council by September.
Meanwhile, from an economic perspective, the military government has been
quick to set up a new Board of Investment (BOI), which should pave the way
for FDI approvals. On this point, FDI approvals plunged by 88% YoY to only
Bt30bn in the first five months of this year. While the new BOI approved 18
investment projects worth Bt122.8bn, including both local and foreign
investment, in its first board meeting held on 18 June. The largest project
approved at the meeting was a Toyota car and parts manufacturing plant
project, with an investment value of Bt51.5bn.
From a stock-market perspective, the news of the coup did not make great
waves because the market had been incredibly resilient in the first four
months of 2014, despite the growing uncertainty, most particularly given the
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
SET 200-day moving average
May coup
The militarys strategy
FDI data
Slowing credit growth



overwhelming evidence that the political problems have negatively impacted
economic growth, as reflected in weakening consumption, investment and
credit related data. Thus, the private consumption index and the private
investment index declined by 0.3% YoY and 2.9% YoY in May. While Thai
depository corporations private credit growth has slowed from a recent high
of 17.5%YoY reached in September 2011 to 7.8% YoY in May.
The other point is that the market has held up, despite massive net selling by
foreign investors, though there was some net buying between March and April.
Thus, foreigners have sold a net Bt41bn worth of Thai stocks so far this year,
after selling a net Bt194bn in 2013. They have now sold over the past 18
months more than what they bought in the four years between 2009 and 2012.
Part of the reason for this resilience is that local institutional investors have
put spare cash to work in the first half of the year. Thus, domestic institutions
have bought a net Bt42bn worth of Thai stocks so far this year. In this
respect, it is also worth noting that domestic institutional investors receive
significant inflows as a result of two tax-incentivised investment schemes set
up in 2002 and 2004 by the first Thaksin government to encourage long-term
savings. These are Retirement Mutual Funds (RMFs) and Long-Term Equity
Funds (LTFs). A significant part of these inflows have to be invested in
equities. For the Retirement Mutual Fund, individuals are obliged to make
regular annual contributions for at least five years with a minimum of Bt5,000
per year but not exceeding 15% of taxable income or Bt500,000 (including
contribution to provident funds), whichever is lower, and can only cash out
without any penalty at the age of 55 or older. As for the LTFs, individuals can
invest up to 15% of their taxable income or a maximum of Bt500,000 per
year and use the proceeds as tax deductible. There is no requirement for
regular contributions but investors must hold the investment for five calendar
years to avoid penalties. Estimated net annual flows into RMFs and LTFs rose
to Bt49bn in 2013 and have averaged Bt21bn since 2004.
Finally, from a valuation perspective, CLSAs Thai universe of 45 companies
under coverage trades at 13x forecast 2014 earnings, assuming 6% earnings
growth with a forecast ROE of 16%. Meanwhile, CLSAs economic teams
forecast a rebound in Thailand real GDP growth to 2.7% in 2015, up from 0.8%
in 2014. Public infrastructure spending should lift growth but the critical
variable will be whether private sector investment will also revive post-coup.
CLSA Thailand universe trailing price-to-book

0.8
1.3
1.8
2.3
2.8
3.3
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(x)
Foreign selling data
Domestic investment
schemes
Stock market valuation



Thailand real GDP, consumption and investment growth

Source: CEIC Data
Private consumption index and private investment index growth

Source: Bank of Thailand, CEIC Data
FDI applications approved by the Board of Investment

Note: Data up to May 2014. Source: CEIC Data, Thai Board of Investment
(20)
(15)
(10)
(5)
0
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(% YoY)
Real GDP growth
Real private consumption growth
Real investment growth (GFCF)
(9)
(6)
(3)
0
3
6
9
12
(30)
(20)
(10)
0
10
20
30
40
2007 2008 2009 2010 2011 2012 2013 2014
Private investment index (LHS)
Private consumption index
(% YoY) (% YoY)
0
100
200
300
400
500
600
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
5
M
1
3
5
M
1
4
(Btbn)
Japan Other countries
Bottoming out?
Also bottoming
out?
The impact of
politics



Thailand depository corporations' private credit growth

Source: CEIC Data, Bank of Thailand
Cumulative foreign net buying of Thai stocks

Source: Bloomberg
Cumulative local institutions and retail net buying of Thai stocks

Source: Bloomberg
0
2
4
6
8
10
12
14
16
18
20
J
a
n

0
4
J
u
n

0
4
N
o
v

0
4
A
p
r

0
5
S
e
p

0
5
F
e
b

0
6
J
u
l

0
6
D
e
c

0
6
M
a
y

0
7
O
c
t

0
7
M
a
r

0
8
A
u
g

0
8
J
a
n

0
9
J
u
n

0
9
N
o
v

0
9
A
p
r

1
0
S
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p

1
0
F
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1
1
J
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l

1
1
D
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1
1
M
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1
2
O
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t

1
2
M
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r

1
3
A
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g

1
3
J
a
n

1
4
(% YoY)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
(200)
(150)
(100)
(50)
0
50
100
150
J
a
n

0
7
M
a
y

0
7
S
e
p

0
7
J
a
n

0
8
M
a
y

0
8
S
e
p

0
8
J
a
n

0
9
M
a
y

0
9
S
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p

0
9
J
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n

1
0
M
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y

1
0
S
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p

1
0
J
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n

1
1
M
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1
1
S
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1
1
J
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1
2
M
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1
2
S
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p

1
2
J
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1
3
M
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y

1
3
S
e
p

1
3
J
a
n

1
4
M
a
y

1
4
(Btbn) Foreign net buying of Thai equities
Thai SET Index (RHS)
(150)
(100)
(50)
0
50
100
150
J
a
n

0
7
M
a
y

0
7
S
e
p

0
7
J
a
n

0
8
M
a
y

0
8
S
e
p

0
8
J
a
n

0
9
M
a
y

0
9
S
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p

0
9
J
a
n

1
0
M
a
y

1
0
S
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p

1
0
J
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1
1
M
a
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1
1
S
e
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1
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J
a
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1
2
M
a
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1
2
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1
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J
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1
3
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1
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1
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1
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(Btbn) Domestic institutions Local individuals
Credit growth
has slowed a lot
. . .
. . . While
foreigners have
sold a lot of
stocks . . .
. . . But domestic
institutions keep
buying

Appendix Asia Maxima

Appendix
Economic indicators
2012 2013 14CL 15CL 2012 2013 14CL 15CL
Real GDP growth (% YoY) CPI inflation (% YoY, year average)
Australia 3.6 2.4 2.8 3.0 1.8 2.4 2.6 2.5
China 7.7 7.7 7.2 7.3 2.7 2.6 2.2 2.6
Hong Kong 1.5 2.9 3.9 4.1 4.1 4.3 4.1 3.8
India 4.5 4.7 5.2 6.5 10.2 9.5 7.5 6.4
Indonesia 6.3 5.8 4.8 5.6 3.9 6.1 7.1 6.0
Korea 2.3 3.0 4.0 3.7 2.2 1.3 1.8 2.8
Malaysia 5.6 4.7 5.6 5.1 1.7 2.1 3.7 4.9
Philippines 6.8 7.2 6.0 6.5 3.2 2.9 4.4 4.5
Singapore 2.5 3.9 5.0 3.9 4.6 2.4 1.9 2.0
Taiwan 1.5 2.1 4.5 3.6 1.9 0.8 1.4 1.3
Thailand 6.5 2.9 0.8 2.7 3.0 2.2 2.4 3.2
Current-account balance (US$bn) Current account balance (% GDP)
Australia (64.8) (48.7) (25.5) (14.0) (4.2) (3.2) (1.7) (1.0)
China 215.4 182.8 208.4 238.4 2.6 2.0 2.1 2.2
Hong Kong 4.3 5.6 14.5 13.2 1.6 2.1 5.0 4.3
India (88.2) (32.4) (45.1) (58.9) (4.7) (1.7) (2.2) (2.6)
Indonesia (24.4) (29.1) (17.8) (22.0) (2.8) (3.4) (2.0) (2.2)
Korea 50.8 79.9 92.7 82.9 4.2 6.1 6.2 5.3
Malaysia 17.7 12.6 17.9 18.8 5.8 4.0 5.4 5.3
Philippines 7.0 9.4 8.3 6.0 2.8 3.5 2.9 2.0
Singapore 50.1 54.5 64.3 64.4 17.5 18.3 20.3 19.1
Taiwan 50.7 57.7 69.3 72.1 10.6 11.8 13.5 13.2
Thailand (1.5) (2.8) 11.4 9.3 (0.4) (0.7) 3.0 2.4
Exchange rates versus US$ (year end) Policy interest rates (%, year end)
Australia 1.05 0.90 0.90 0.80 3.00 2.50 2.50 2.75
China 6.23 6.05 6.22 6.22 3.00 3.00 3.00 3.00
Hong Kong 7.75 7.75 7.76 7.78 0.40 0.38 0.38 0.80
India 54.4 60.1 62.0 64.0 7.50 8.00 8.00 8.00
Indonesia 9,670 12,189 11,250 11,000 5.75 7.50 7.75 7.00
Korea 1,075 1,056 1,000 1,050 2.75 2.50 2.50 2.75
Malaysia 3.06 3.28 3.26 3.31 3.00 3.00 3.50 4.00
Philippines 41.2 44.4 45.0 46.5 3.50 3.50 4.00 4.75
Singapore 1.22 1.27 1.24 1.24 0.38 0.40 0.43 1.00
Taiwan 29.0 29.7 29.8 29.8 1.88 1.88 2.00 2.13
Thailand 30.6 32.9 32.8 34.0 2.75 2.25 1.75 1.75
Note: Fiscal year beginning 1 April for India. Australian exchange rate quoted in US$/A$. WPI inflation for India. Policy rates - Australia: Cash target
rate, China: 1Y savings rate, HK: 3M Hibor, India: Repo rate, Indonesia: BI policy rate, Korea: Call rate, Malaysia: Overnight policy rate, Philippines:
O/N reverse repo rate, Singapore: 3M Sibor, Taiwan: Rediscount rate, Thailand: 1-day repo rate. Source: CLSA - Economics teams forecasts


Market valuations
2012 2013 14CL 15CL 2012 2013 14CL 15CL
PE (x) Earnings growth (%)
Asia Pac ex-Japan 12.4 13.3 12.2 11.0 (1.1) (9.5) 7.0 10.0
Japan 23.0 15.9 13.5 12.2 13.3 45.4 17.4 11.1
Australia 10.0 15.1 13.9 13.5 (10.3) (34.5) 9.1 3.1
China 10.6 9.3 8.7 7.8 5.3 11.5 7.7 10.5
Hong Kong 13.7 13.8 12.9 12.5 (14.2) (0.2) 6.6 3.4
India 20.7 19.1 16.8 14.3 7.8 8.2 13.4 17.4
Indonesia 17.1 16.1 14.5 12.9 13.2 6.5 11.0 12.4
Korea 10.8 10.9 9.9 8.3 13.4 (0.6) 9.5 20.3
Malaysia 17.5 18.1 16.9 15.4 9.1 (3.0) 6.8 9.6
Philippines 21.0 19.7 18.9 16.5 10.6 7.3 4.6 14.8
Singapore 13.1 13.8 14.0 12.8 (5.8) (5.0) (1.5) 9.5
Taiwan 21.1 17.6 14.7 13.3 6.9 19.8 19.8 11.0
Thailand 14.2 13.9 13.1 11.4 19.1 2.4 5.9 15.4
PB (x) Dividend yield (%)
Asia Pac ex-Japan 1.8 1.7 1.5 1.4 2.9 3.2 3.5 3.7
Japan 1.5 1.3 1.3 0.3 1.6 1.8 1.9 2.0
Australia 2.0 2.1 1.9 1.8 3.9 4.3 4.7 5.0
China 1.7 1.5 1.3 1.1 3.4 3.9 3.9 4.2
Hong Kong 1.3 1.3 1.2 1.1 3.2 3.5 4.2 4.0
India 3.2 2.8 2.5 2.2 1.2 1.3 1.5 1.7
Indonesia 3.8 3.3 2.8 2.5 2.1 2.3 2.5 2.8
Korea 1.3 1.1 1.0 0.9 1.2 1.3 1.3 1.6
Malaysia 2.6 2.4 2.2 2.0 3.1 3.1 3.0 3.2
Philippines 3.1 2.8 2.5 2.3 2.1 2.2 2.3 2.4
Singapore 1.5 1.5 1.4 1.3 3.2 3.3 3.4 3.6
Taiwan 2.3 2.1 2.0 1.8 2.8 3.0 3.5 3.9
Thailand 2.4 2.2 2.0 1.8 3.0 3.2 3.4 3.8
ROE (%) Net debt/equity (%)
Asia Pac ex-Japan 13.9 13.4 13.5 13.5 30.5 30.8 26.6 21.9
Japan 7.4 9.9 10.2 10.4 44.8 41.1 35.4 29.7
Australia 13.6 13.7 14.5 14.1 41.5 42.7 40.4 38.3
China 16.9 16.6 15.8 15.5 30.5 37.1 34.7 30.1
Hong Kong 10.8 9.9 10.6 9.3 21.0 19.6 16.2 14.1
India 18.1 17.5 17.4 17.8 46.9 54.3 46.1 37.7
Indonesia 24.2 22.1 21.1 20.6 16.7 20.1 21.7 16.4
Korea 12.4 11.1 11.0 12.0 26.5 21.5 15.0 7.8
Malaysia 15.8 14.2 14.0 14.2 17.3 22.5 19.7 15.8
Philippines 15.8 15.1 14.0 14.7 41.0 48.1 50.0 47.2
Singapore 12.5 10.9 10.3 10.6 35.0 34.0 34.3 35.1
Taiwan 11.2 12.6 14.1 14.4 8.5 4.5 (1.9) (8.3)
Thailand 18.3 16.6 15.9 16.7 49.8 59.2 53.6 43.2
Note: Based on CLSA universe of companies under coverage. Calendarised valuations in local currency terms. Source: CLSA evalu@tor


MSCI regional and country index performance (in US$ terms)
(% chg in US$ terms) 2010 2011 2012 2013 2Q13 3Q13 4Q13 1Q14 2Q14
All Country (AC) indices
AC World 10.4 (9.4) 13.4 20.3 (1.2) 7.4 6.9 0.6 4.3
AC World ex-US 8.4 (16.1) 13.3 12.3 (4.2) 9.4 4.4 (0.1) 4.0
AC World ex-Japan 10.1 (8.8) 14.1 19.9 (1.6) 7.5 7.4 1.2 4.1
AC Europe 1.6 (14.5) 15.4 20.1 (2.5) 13.0 7.1 1.2 2.1
AC Asia Pacific 14.3 (17.3) 13.6 9.3 (3.7) 6.2 2.0 (2.4) 5.6
AC Asia Pacific ex-Japan 15.0 (18.0) 18.6 0.5 (8.6) 6.3 1.9 0.4 5.0
AC Asia ex-Japan 17.0 (19.2) 19.4 0.7 (6.3) 4.9 3.3 (1.1) 6.2
AC Far East ex-Japan 16.7 (16.8) 19.0 1.3 (6.3) 5.9 2.7 (1.8) 5.7
Developed markets indices
World (Developed) 9.6 (7.6) 13.2 24.1 (0.1) 7.7 7.6 0.8 4.2
World ex-US 6.2 (14.8) 12.8 17.8 (2.7) 10.7 5.2 0.1 3.5
World ex-Japan (Kokusai) 9.1 (6.6) 13.9 24.0 (0.5) 7.9 8.2 1.4 4.0
EAFE 4.9 (14.8) 13.6 19.4 (2.1) 10.9 5.4 0.0 2.9
Europe 1.0 (13.8) 15.2 21.7 (2.0) 13.2 7.5 1.5 1.9
North America 13.6 (1.6) 12.9 27.6 1.4 5.4 9.3 1.3 5.0
Emerging markets indices
Emerging Markets (EM) 16.4 (20.4) 15.1 (5.0) (9.1) 5.0 1.5 (0.8) 5.6
EM Asia 16.6 (19.1) 18.1 (0.2) (6.3) 4.5 3.6 (0.6) 6.3
EM Latin America 12.1 (21.9) 5.4 (15.7) (16.5) 3.6 (3.1) (0.2) 5.5
EM EMEA 20.9 (22.6) 17.7 (8.0) (9.8) 8.5 (0.2) (2.1) 3.6
BRIC 7.3 (24.8) 11.0 (6.3) (11.6) 7.9 1.4 (3.1) 6.2
Asia Pacific
Australia 10.0 (14.8) 16.4 (0.3) (14.7) 10.4 (1.7) 4.6 1.8
China 2.3 (20.3) 19.0 0.4 (9.1) 11.5 3.8 (5.9) 3.5
Hong Kong 19.7 (18.4) 24.4 8.1 (5.9) 8.1 3.0 (3.8) 6.7
India 19.4 (38.0) 23.9 (5.3) (6.2) (5.7) 10.1 7.8 12.1
Indonesia 31.2 4.0 2.4 (25.0) (8.1) (24.1) (5.0) 21.0 (1.0)
Japan 13.4 (16.2) 5.8 24.9 4.2 6.0 2.1 (6.3) 6.5
Korea 25.3 (12.8) 20.2 3.1 (10.0) 14.9 4.0 (3.0) 6.4
Malaysia 32.5 (2.9) 10.8 4.2 4.9 (3.9) 4.7 (1.0) 2.5
New Zealand 3.2 1.1 23.0 6.2 (10.4) 14.9 (4.5) 14.7 (2.3)
Philippines 30.3 (3.2) 43.9 (4.3) (9.3) (5.7) (5.1) 9.1 8.7
Singapore 18.4 (21.0) 26.4 (1.8) (7.6) 3.2 0.2 (1.1) 4.1
Taiwan 18.3 (23.3) 13.4 6.6 1.6 0.8 4.3 1.1 10.0
Thailand 50.8 (5.6) 30.9 (16.9) (9.6) (6.1) (10.5) 6.5 6.5
Continued to the next page


MSCI regional and country index performance (in US$ terms) (continued)
(% chg in US$ terms) 2010 2011 2012 2013 2Q13 3Q13 4Q13 1Q14 2Q14
North America
USA 13.2 (0.1) 13.5 29.9 2.2 5.2 9.7 1.3 4.7
Canada 18.2 (14.4) 6.7 3.3 (8.0) 8.2 3.5 1.0 9.3
Latin America
Brazil 3.8 (24.9) (3.5) (18.7) (18.4) 7.7 (6.2) 2.0 5.7
Chile 41.8 (22.1) 5.6 (23.0) (15.5) (5.6) (7.3) (2.9) 1.3
Colombia 40.8 (7.1) 31.6 (23.7) (15.1) 9.1 (11.5) 4.7 5.7
Mexico 26.0 (13.5) 27.1 (2.0) (11.7) (2.0) 7.0 (5.1) 6.2
Peru 49.2 (23.9) 15.5 (31.0) (28.4) (3.8) 2.9 4.2 7.6
Europe
Austria 7.3 (37.8) 22.6 10.9 (4.1) 18.3 2.8 (2.9) (1.8)
Belgium (2.2) (12.6) 36.1 24.6 (6.2) 13.5 7.6 2.3 3.5
Czech Republic (7.4) (11.3) (3.1) (14.9) (11.8) 13.3 (0.8) 7.6 0.1
Denmark 29.8 (16.8) 29.6 23.4 (4.2) 13.6 10.2 14.8 2.9
Finland 7.1 (34.2) 10.0 41.6 (1.6) 26.6 11.6 (0.7) 1.4
France (6.7) (19.3) 17.7 23.3 0.8 15.3 5.7 2.8 (0.1)
Germany 6.0 (20.1) 27.2 28.2 0.5 12.7 13.3 (0.5) (0.2)
Greece (46.4) (63.6) (0.8) 44.8 (12.8) 33.6 9.0 0.0 0.0
Hungary (10.7) (34.7) 18.7 (9.0) 9.3 (4.9) (6.3) (8.7) 1.5
Ireland (19.7) 11.4 3.8 38.9 (3.7) 16.4 11.3 13.1 (9.1)
Italy (17.6) (25.8) 8.6 16.9 (1.4) 19.0 10.5 14.6 (1.7)
Netherlands (0.6) (14.4) 17.2 28.5 1.3 14.4 8.4 0.9 (0.4)
Norway 7.4 (12.8) 13.7 5.3 (8.5) 8.6 5.5 1.8 6.6
Poland 12.6 (32.6) 32.1 (1.7) (5.8) 14.1 3.3 3.4 (2.3)
Portugal (14.6) (25.7) (0.7) 7.5 (3.6) 10.5 1.3 9.7 (4.8)
Russia 17.2 (20.9) 9.6 (2.6) (11.1) 13.1 0.2 (14.4) 9.8
Spain (25.4) (16.9) (3.3) 27.7 (1.5) 25.1 10.8 4.7 6.5
Sweden 31.3 (17.8) 18.7 21.4 (7.7) 15.2 5.2 1.5 (2.4)
Switzerland 9.8 (9.1) 17.3 23.8 (1.7) 9.4 4.3 3.9 0.6
Turkey 18.4 (36.8) 60.5 (28.1) (16.9) (6.7) (14.2) 4.6 13.5
UK 5.2 (6.1) 10.8 16.2 (3.3) 11.0 6.7 (1.8) 5.0
Middle East/Africa
Egypt 9.5 (48.8) 44.5 6.2 (11.4) 12.6 19.4 7.6 0.3
Israel 2.2 (29.8) (7.0) 8.0 (5.3) 1.2 5.7 17.8 1.6
Morocco 10.8 (18.8) (16.5) (7.1) (6.3) 0.1 2.1 5.6 (4.8)
South Africa 30.7 (17.3) 14.8 (8.8) (8.0) 7.9 1.7 3.8 4.0
Source: Datastream


MSCI Asia Pacific ex-Japan index relative performance
Japan

Australia

China

Hong Kong

Note: Performance in US$ terms. Source: Datastream, CLSA
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011 2013
MSCI AC Asia Pacific ex-Japan
MSCI Japan
(1/1/01 =100)
20
30
40
50
60
70
80
90
100
110
120
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011 2013
MSCI Australia
(1/1/01 =100)
90
95
100
105
110
115
120
125
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
50
100
150
200
250
300
350
400
450
500
2001 2003 2005 2007 2009 2011 2013
MSCI China
(1/1/01 =100)
60
70
80
90
100
110
120
130
140
150
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011 2013
MSCI Hong Kong
(1/1/01 =100)
50
55
60
65
70
75
80
85
90
95
100
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)


India

Indonesia

Korea

Malaysia

0
100
200
300
400
500
600
700
2001 2003 2005 2007 2009 2011 2013
MSCI India
(1/1/01 =100)
60
80
100
120
140
160
180
200
220
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
200
400
600
800
1,000
1,200
1,400
1,600
2001 2003 2005 2007 2009 2011 2013
MSCI Indonesia
(1/1/01 =100)
0
100
200
300
400
500
600
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
100
200
300
400
500
600
700
2001 2003 2005 2007 2009 2011 2013
MSCI Korea
(1/1/01 =100)
100
120
140
160
180
200
220
240
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011 2013
MSCI Malaysia
(1/1/01 =100)
70
80
90
100
110
120
130
140
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)


Philippines

Singapore

Taiwan

Thailand

0
50
100
150
200
250
300
350
400
450
2001 2003 2005 2007 2009 2011 2013
MSCI Philippines
(1/1/01 =100)
50
70
90
110
130
150
170
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011 2013
MSCI Singapore
(1/1/01 =100)
60
65
70
75
80
85
90
95
100
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
50
100
150
200
250
300
350
400
2001 2003 2005 2007 2009 2011 2013
MSCI Taiwan
(1/1/01 =100)
40
50
60
70
80
90
100
110
120
130
140
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)
0
100
200
300
400
500
600
700
800
900
2001 2003 2005 2007 2009 2011 2013
MSCI Thailand
(1/1/01 =100)
100
120
140
160
180
200
220
240
260
280
300
320
2001 2003 2005 2007 2009 2011 2013
(1/1/01 =100)


Change in IBES consensus earnings growth forecasts

MSCI AC Asia ex-Japan

MSCI Australia

MSCI Japan

MSCI China

MSCI Hong Kong

MSCI India MSCI Indonesia

Note: Year ending 30 June for Australia, beginning 1 April for Japan. Source: I/B/E/S, Datastream
0
2
4
6
8
10
12
14
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1
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M
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1
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A
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1
4
M
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1
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J
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1
4
(%)
2014 2015
0
2
4
6
8
10
12
14
16
J
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1
3
F
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1
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1
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1
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1
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J
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1
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(%)
2014 2015
0
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6
8
10
12
J
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1
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M
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1
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J
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1
4
(%) 2014 2015
0
2
4
6
8
10
12
14
J
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1
3
F
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1
3
M
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1
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1
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M
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1
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1
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1
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1
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M
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1
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A
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1
4
M
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1
4
J
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1
4
(%)
2014 2015
0
2
4
6
8
10
12
14
J
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1
3
F
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1
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M
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1
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1
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1
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J
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1
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(%)
2014 2015
0
2
4
6
8
10
12
14
J
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1
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F
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1
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3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%) 2014 2015
0
3
6
9
12
15
18
21
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015
0
2
4
6
8
10
12
14
16
18
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015


Change in IBES consensus earnings growth forecasts
MSCI Korea

MSCI Malaysia

MSCI Philippines

MSCI Singapore

MSCI Taiwan

MSCI Thailand

Note: Year ending 30 June for Australia, beginning 1 April for Japan. Source: I/B/E/S, Datastream

0
5
10
15
20
25
30
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015
0
2
4
6
8
10
12
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015
0
2
4
6
8
10
12
14
16
18
20
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015
0
2
4
6
8
10
12
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015
0
2
4
6
8
10
12
14
16
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015
0
2
4
6
8
10
12
14
16
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
J
u
n

1
4
(%)
2014 2015


Asian currencies against the US dollar
Australia

Japan

China

Hong Kong

India

Indonesia

Source: Datastream
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1997 1999 2001 2003 2005 2007 2009 2011 2013
(US$/A$)
70
80
90
100
110
120
130
140
150
1997 1999 2001 2003 2005 2007 2009 2011 2013
(/US$, inverted scale)
6.0
6.5
7.0
7.5
8.0
8.5
1997 1999 2001 2003 2005 2007 2009 2011 2013
(Rmb/US$, inverted scale)
7.70
7.72
7.74
7.76
7.78
7.80
7.82
7.84
1997 1999 2001 2003 2005 2007 2009 2011 2013
(HK$/US$, inverted scale)
35
40
45
50
55
60
65
70
1997 1999 2001 2003 2005 2007 2009 2011 2013
(Rs/US$, inverted scale)
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1997 1999 2001 2003 2005 2007 2009 2011 2013
(Rp/US$, inverted scale)


Asian currencies against the US dollar
Korea

Malaysia

Philippines

Singapore

Taiwan

Thailand

Source: Datastream
800
1,000
1,200
1,400
1,600
1,800
2,000
1997 1999 2001 2003 2005 2007 2009 2011 2013
(won/US$, inverted scale) 2.2
2.7
3.2
3.7
4.2
4.7
5.2
5.7
1997 1999 2001 2003 2005 2007 2009 2011 2013
(RM/US$, inverted scale)
25
30
35
40
45
50
55
60
1997 1999 2001 2003 2005 2007 2009 2011 2013
(P/US$, inverted scale) 1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1997 1999 2001 2003 2005 2007 2009 2011 2013
(S$/US$, inverted scale)
27
28
29
30
31
32
33
34
35
36
1997 1999 2001 2003 2005 2007 2009 2011 2013
(NT$/US$, inverted scale)
22
27
32
37
42
47
52
57
62
1997 1999 2001 2003 2005 2007 2009 2011 2013
(Bt/US$, inverted scale)

Asia Maxima


Notes

Asia Maxima


Notes

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