April 11, 2012

Equity Market Review 1Q 12: A Positive Quarter for All Markets
Following a weak 2011, equity markets have posted much better returns in 2012, with numerous markets under our coverage delivering strong double-digit returns

by iFAST Research Team

Untitled Document


Table 1: Market Performance (in SGD terms)
Market Index 1Q 2012



















Emerging Markets

MSCI Emerging Markets


Asia ex-Japan

MSCI Asia ex-Japan






S&P 500


Hong Kong




MSCI World



Nikkei 225



Stoxx 600






S&P / ASX 200








Source: iFAST Compilations
Data as of end March 2012

A welcome breath of fresh air for investors

The strong performance of equity markets in 2012 has been a welcome breath of fresh air for investors, following a rather disappointing 2011. Global equities posted a healthy 7.9% return for the quarter, while Asian and Emerging Market equities fared better, delivering returns of 9.9% and 10.2% respectively. Emerging market performance was led by Russia and Brazil, which delivered returns of 14.9% and 12.4% for the quarter. Within Asia, Thailand, India, Singapore and Taiwan equities were some of the better-performing markets (up 16%, 13.8%, 13.75% and 11.6% respectively), while Indonesian and Malaysian equities were laggards, but still managed returns of 4.3% and 4.6% respectively. Japanese equities rose a hefty 19.3% (in yen terms) in the quarter, but the weakening of the Japanese yen cut returns in SGD terms to 7.7%, still representing a healthy return.

[Otherwise stated, all returns in SGD terms, as of 31 March 2012]

European Concerns Ebb, US Economy Recovering

Concerns over a potential financial crisis in the Eurozone have ebbed substantially, especially after the successful negotiation for a restructuring of privately-held Greek debt. The ECB has also played a crucial role in maintaining financial market stability, lending European financial institutions approximately 1 trillion euros for up to 3 years via its Long Term Refinancing Operation (LTRO) programme to soothe financial sector refinancing concerns.

While economic data out of Europe is consistent with recessionary conditions, the US economy has been gaining strength, with the job market seeing healthy growth. Private sector nonfarm payrolls have risen for two consecutive years (since March 2010), offsetting weakness in public sector hiring. The housing market also appears to be turning the corner, with improving homebuilder sentiment, falling inventory levels, rising housing starts, and multiyear-high affordability all set to fuel a recovery in the sector.

China Aiming For Sustainable Growth, Pro-growth monetary policy in Emerging Markets

China’s focus on sustainable growth has led to a lowering of the country’s official long-term growth target from 8% to 7.5% - the move is both a form of “low-balling” by the government as well as a necessary trade-off in a move towards consumption-driven growth. In our opinion, the move towards improving the sustainability of growth in China should be viewed positively, and we do not view the latest development as detrimental to the China market’s long-term prospects.   

Higher oil prices have seen Russian equities outperform in 1Q 12, as the Russian market (about 55% of the RTSI$ index is in the energy sector) is often perceived as a key beneficiary of higher energy prices. The Brazilian equity market has also posted a substantial rebound, following a series of larger-than-expected rate cuts by the Copom, which highlights the central bank’s intention to keep monetary policy accommodative in support of economic growth.

Even as we head into 2Q 12, let’s look back at some of the stronger-performing markets (Thailand, Russia and India) as well as the laggards (Indonesia and Malaysia) to see what drove or detracted from performance.

Top Performing Markets

Thailand (+16% in SGD terms)

The Thailand equity market, as represented by the SET Index, rose 16.7% (in local currency terms) or 16% (in SGD terms) in 1Q 12. This stellar performance made the Thailand equity market the best-performing market among the equity markets under our coverage. The strong performance caught many investors by surprise, considering the economic impact of the worst flood crisis in five decades which happened in late July last year.

One of the factors that contributed to the strong performance of the SET Index is the rebound in some of the widely-followed leading indicators like consumer confidence, business sentiment, manufacturing production and capacity utilisation after achieving historical lows following the flooding. Also, export growth which is seen as a key economic indicator has rebounded strongly to post year-on-year growth of 0.9% in February, after a -12.4% contraction in November last year. The rebound in various economic indicators suggests that Thailand’s economy is set to recover in 2012 after full-year growth of just 0.1% in 2011. In line with this, the Bank of Thailand (BoT) has also raised its forecast (at the March Monetary Policy Meeting) for economic growth this year from 4.9% to 5.7%.

The government’s post-flood budget stimulus package which was approved by Thailand’s cabinet on 27 December 2011 and the easing by the BoT are also catalysts for the good performance of the SET Index. The stimulus package which amounts to a total of THB350 billion is to improve the infrastructure and water management systems in the country to avoid any repeat of the massive flooding and to restore investor confidence. In addition, the BoT has started to ease monetary policy, cutting the benchmark interest rate by 25 basis points in each of the monetary policy meetings which were held in November 2011 and January this year to 3.0% in order to promote economic growth. The BoT has also started providing low-interest loans (0.01% interest rate) at the beginning of March to individuals and businesses that have been affected by the floods. Overall, the stimulus package and the easing by BoT are expected to provide a boost to Thailand’s economy growth and we expect Thailand’s economy to recover in the first half of this year.

Due to the strong rally of the Thailand equity market, valuations have risen, making the market less attractive when compared with North Asian markets such as China, Hong Kong and Taiwan. As of 30 March 2012, Thailand earnings are expected to post growth of 14.2% in 2012 and 17.3% in 2013 which translate into estimated PEs of 12.8X and 10.9X respectively as compare to its fair PE of 12.5X. With this, the potential upside by end of 2013 is around 14.3% which is still a decent return for investors. As such, we maintain a 3.0 stars “attractive” rating for the Thailand equity market.

Russia (+14.9% in SGD terms)

The Russian market, as represented by the RTSI$ Index, outperformed most of the other markets under our coverage (apart from Thailand) to end 1Q 2012 as the second-best performing market under our coverage, rising 14.9% (in SGD terms) to reach 2058.14 index points. Its performance was primarily driven by rising oil prices. The globally-tracked Brent blend and the predominantly Russian tracked Urals crude have risen by 15.6% and 13.2% respectively (in USD terms) in 1Q 2012 in the wake of continued tensions in the Straits of Hormuz and global economic recovery hopes.

While the energy-heavy Russian market is likely to be one of the larger beneficiaries of higher oil prices, we do not advocate investors invest in the market as a proxy to speculating on oil prices. Rather, we continue to see good progress and developments being made in our preferred sectors for Russia: the Financial and Consumer sectors.

Driven by strong real wage growth and declining unemployment, Russian consumer spending has been resurgent. Furthermore, the electoral populist promises of Putin look set to further propel consumer spending. The Russian financial sector has on the rise as well, benefitting from the Russian consumer and low levels of non-performing loans. Despite the health of the Russian financial sector, we note that its high concentration of Russian assets on its books leaves it exposed to inherent risks arising from a lack of asset diversification.

At a forward PE of 5.8X (as of 30 March 2012) Russia remains one of the world’s cheapest markets. With potential upside of 37% (by end-2013), Russia has plenty of potential value to be unlocked. However, investors should take note of the fact that Russia has traditionally been a cheap market due to various risks such as poor corporate governance, corruption and political power-struggles. We have a 4.0 star “very attractive” rating on the Russian equity market.

India (+13.8% in SGD terms)

The Indian equity market (represented by the BSE Sensex), which was amongst the bottom-performing markets in 2011, rose by 13.8% in SGD terms for 1Q 12. In terms of INR (local currency), the market is up by 13% and is amongst the top three performing markets under our coverage. The Sensex index started the year with a strong return of 15.7% (in SGD terms) in January on strong inflow of FIIs money owing to the improvement in risk appetite and probable reversal of the interest rate cycle in India. The market lost close to 5% in March after delivering 19.5% till February.

The central bank of India has increased its policy rates 13 times since March 2010 to tame the high inflation, which has resulted in a severe slowing in economic growth. While inflation has remained persistently high above 9% in 2011, price increases slowed to 7.47% in December 2011, and along with the moderating economic growth rate, optimism has gained over a reversal of the interest cycle. The Reserve Bank of India (RBI) has cut the cash reserve ratio (CRR) twice since January 2012 by 125 basis points from 6% to 4.75% to ease the liquidity in the banking system and assist credit growth. The recent cut of CRR had made the case more clear for a reversal of monetary policy in the near future.

The rebound of the US economy and positive news from the debt-ridden Eurozone lifted the risk averseness of global investors. Financial Institutional Investors (FIIs) who withdrew USD357 million from Indian equities in 2011 have turned net buyers in 2012. FIIs have pumped in USD2037 million in January alone, helping India become one of the best performing markets in the month. Inflows from FIIs continued in February and March as well, with total net inflows in 2012 so far at USD8.85 billion. As per our estimates, the Indian equity market is currently valued at a PE of 14.97X and 12.91X for 2011-12 and 2012-13 (as on 30 March 2012). We have an “attractive” rating of 3.5 stars for the Indian market.

Bottom Performers

Indonesia (+4.3% in SGD terms)

Following a strong performance in 2011, Indonesia experienced a weak start in 2012 with the Jakarta Composite Index (JCI) edging slightly higher for the quarter, closing at 4121.55 points as of 30 March 2012 for a year-to-date return of 3.4% on local currency terms (or 4.3% in SGD terms).

Several key issues led to relative underperformance for Indonesian equities in the quarter. Firstly, foreign fund inflows have been stagnant in the January and February. In these two months, we saw net selling by foreign funds in 22 out of 42 trading days while foreign stock net investment  dipped to -87 trillion rupiah at the end of February on cumulative basis before rebounding to 1,092 trillion rupiah at the end of March.

Secondly, the announcement of a proposed 33% fuel hike and a 10% upward revision for electricity tariffs hurt investor sentiment, as the move fueled fears of rising inflation in Indonesia. Heightened inflation has the potential to hurt consumer spending which could affect automobile and consumer goods companies in particular; not surprisingly, these were the worst performers in the JCI over the quarter.

Thirdly, a slew of new regulations dampened investor enthusiasm for selected market sectors. An increase in down payments on private vehicle and mortgages was aimed at averting potential asset price inflation, but weighed on banking stocks’ future loan growth and estimated earnings. On the other hand, the mandatory gradual divestment of foreign stakes to 49% starting in the fifth year of production in mining companies along with an imposition of unprocessed mineral ore export tax and the requirement of local refinery and smelting will increase the cost of production and narrow the profit margin of mining companies.

As the optimism over Indonesia’s resilient economy has drawn investors in recent years, valuations have risen in tandem. With the Indonesian market expected to deliver lower upside compared to other markets, we maintain a neutral stance on the market with a 2.5 star “neutral” ratings.

Malaysia (+4.6% in SGD terms)

In local currency terms, the Malaysian equity market (represented by the FBM KLCI) started the year with a -0.6% loss in January. This was then followed by gains of 3.2% and 1.7% in February and March, leading the market to post a 4.3% gain for 1Q 12. Despite the positive returns, Malaysia was one of the worst-performing markets after Indonesia. This should not be a surprise for investors as the Malaysian equity market is generally perceived as a defensive market that tends to outperform other Asian markets in a downturn but underperform in market upswings.

With more signs of stabilisation in the Eurozone along with gaining momentum in the US economy, the global economic outlook is now becoming less gloomy. As the year progresses, business confidence and investor sentiment are likely to gain in view of the improving global economic conditions. As such, export demand in 2H 12 could turn out better than earlier forecast. With private consumption and investment continuing to be the main drivers, Malaysia’s economy is estimated to grow by 4.0% to 4.5% in 2012.

The key near-term risk for Malaysia is the uncertain outcome of the general election due by March 2013. The market widely expects that the general election is likely to be held in June this year. Similar to the recent Sarawak state election, we expect that the general election is likely to create short-term market volatility upon the announcement of dissolution of the parliament. Nevertheless, the moderate corporate earnings growth prospects (earnings expected to grow by 8.3% and 13.0% in 2012 and 2013) should support an attractive valuation on a longer-term basis.

The 2012 and 2013 estimated PE for FBM KLCI were at 15.8X and 13.7X respectively (as at 30 March 2012), which are just marginally lower than its historical fair PE of 16X. We estimate its upside potential by end-2013 to be around 14.6%, which could be decent returns for investors although it is not as exciting as those in North Asia. Overall, we maintain a 3.0 stars “Attractive” rating for the Malaysian equity market.

Strong returns, but portfolio discipline is important

If markets can continue to build on 1Q 12’s stellar performance, 2012 is shaping up to be a far better year for investors. Even after some strong market performances, equity valuations remain attractive across the board, especially when compared against the meagre bond yields offered in much of the fixed income space, and we continue to maintain a favourable view on equities vis-à-vis fixed income. Nevertheless, investors should not be carried away by the strong returns achieved in equity markets so far; the maintenance of good portfolio discipline involves having a diversified portfolio which consists of both equity funds and fixed income funds in a proportion commensurate with their investment objective and risk appetite. While we believe that fixed income is unlikely to outperform equities, we reiterate that for Diversification, Bond Funds Still Warrant a Place in Your Portfolio.

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