July 7, 2010

Top Performing Markets at Half Time: Indonesia the Runaway Leader
As 2Q 2010 draws to a close, we review how respective market has fared so far, as well as a brief discussion on the drivers of market performances.

by iFAST Research Team

Untitled Document

First quarter GDP growth numbers have turned out to be very robust for most regions of the world, especially in Asia region where many economies have registered double digit quarter-on-quarter annualized growth. Positive economic data in the early part of the quarter kept equity markets buoyant. However, as the second quarter proceeds, negative news took over.

China started to cool property markets by raising down payments and mortgage costs for second mortgages and restricting third mortgage in selected cities. In the US, investors fret over the weak payroll numbers and confidence has fallen in June. In Europe, European Union have stepped in with a massive 750 billion euro package to ensure that funding would be available for ‘peripheral’ countries if they were unable to tap the markets but that offered little comfort as investors believe that the European debt crisis is more of a solvency issue rather than a liquidity issue.

Given the concerns on European debts, it was not surprising that European equity market was the worst performer in the first half of 2010 caused by ruthless selling of euro in the second quarter. Meanwhile, Indonesia leads the pack again in the second quarter. In this half-time, we take a closer look at the top three markets (Indonesia, Thailand and Malaysia) as well as the bottom two markets (Australia and Europe). All returns are in INR terms as at 30 June unless otherwise stated.

Table 1: Top Performing Equity Markets in 1H10
Market Indices % Return
Indonesia JCI 19.0
Thailand SET 11.0
Malaysia KLCI 9.9
India BSE SENSEX 1.4
Singapore FTSE STI -1.8
Korea KOSPI -4.4
Asia ex-Japan MSCI Asia ej-Japan -5.0
Tech Nasdaq 100 -6.7
Russia RT SI$ -6.7
Emerging Markets MSCI Emerging Markets -7.4
US S&P 500 -7.7
Japan Nikkei 225 -7.8
China HSML 100 -7.9
Hong Kong HSI -8.5
World MSCI World -10.6
Taiwan TWSE -11.0
Brazil Bovespa -14.4
Australia S&P/ ASX 200 -16.3
Europe DJ Stoxx 600 -18.2
Source:Bloomberg, iFAST compilations; YTD returns as of 30 June 2010, in INR terms

Indonesia (JCI; +19.0%)

The Indonesian market continues to climb higher in 2Q10 as it emerged as the top performing market under our coverage for the second quarter running after emerging the as the top performing market in 2009 as well. The JCI index return of 19.0% year-to-date  was almost double that of the second top performing market, Thailand, which returned 11.0% over the same period.

The economy grew 5.7% year-on-year in 1Q10 after growing 5.4% in 4Q09. The key contributors to economic growth in 1Q10 came from higher investment which grew 7.9% year-on-year and stronger exports which grew 19.6% year-on-year. Even though government spending fell by 8.8% year-on-year, the negative drag it has on overall GDP growth was limited. After growing 4.6% in 2009, the country is projected to grow by 5.8% in 2010 and 6.2% in 2011. In addition, economic data released continue to surprise on the upside and may result in further upwards revision of forecasted GDP.

Despite the strong growth, the economy shows limited signs of overheating as inflation remains benign compared to historical average. Inflation rate is creeping up slowly but at present level of 4.2% year-on-year increase in May, the government has little pressure to raise benchmark interest rate, thus providing further support for growth. Meanwhile, Moody’s Investor Services recent upgrade of its sovereign rating outlook from stable to positive on 21 June 2010 brings Indonesia one step closer to achieving an investment-grade credit rating, which will help reduce the government’s cost of borrowing from the open market eventually

Consensus estimated earnings growth for Indonesia equity market was 28.6% and 22.7% in 2010 and 2011 respectively. This translates to a forward PE ratio of 14.6X and 11.9X for 2010 and 2011 respectively. While the economic backdrop is positive, valuation of Indonesian equity becomes relatively less attractive in comparison after gaining significantly against other markets. However, current prices appear undemanding based on 2011 estimated earnings and should still provide interesting opportunities to investor who has a stomach for risk.

Thailand (SET; +11.0%)

The performance of Thailand equity market comes as a surprise as the violent protests seems to have a limited impact on both the economy and equity prices. By the end of 2Q10, Thailand remained as our second top performing market, unchanged from 1Q10, returning 11.0% year-to-date.

Both consumption and investment breached new high in April measured by the Private Consumption index (PCI) and Private Investment index (PII). PCI gained 7.0% year-on-year while PII surged 21.7% year-on-year in April. Both indices contributes directly to GDP measured using the expenditure method. As the same time, Thailand’s exports continue to record double digit growth in May, gaining 42.1% year-on-year after a 35.2% gain in April. This is the strongest growth since July 2008. Thailand’s economy grew by 12% quarter-on-quarter in 1Q 2010 and the strong exports growth should support economic growth favorably in 2Q 2010. It should also help offset the economic fallout from the political unrest in April and May.

The violent protest has ended on 19 May 2010 as the army overran the anti-government protesters’ encampment. The protest took 85 lives and left more than a thousand injured. While Prime Minister Abhisit Vejjajiva proposed to hold the general election on 14 November 2010 in his reconciliation plan initially proposed, he withdrew it subsequently when the protestors failed to hold their end of the bargain to disperse. As such, the date of the general election remains uncertain and the political unrest has most likely achieved only a temporary resolution. There is risk to the upside of a probably comeback of the anti-government protests. However, economic growth potential seems to remain intact as suggested by positive economic data. The SET index trades at a forward PE ratio of 11.4X and 9.8X based on consensus estimated earnings growth of 14.9% and 16.6% for 2010 and 2011 respectively. At such valuation levels, equity remain attractively priced and should provide further upside potential for risk takers.

Malaysia (KLCI; +9.9%)

After a commendable performance the first quarter of 2010, KLCI ended the first half up 9.9%. The good performance in 2Q 2010 was triggered by various factors including a stronger-than-expected economic recovery, a stronger ringgit, earlier-than-expected rate hike and announcements of 10MP and NEM (New Economic Model). Malaysia 1Q GDP growth was at +10.1% which exceeded market consensus forecast of 8.5%, driven by improvement in domestic and external demand.

As a result of the economic recovery, the central bank is preempting inflationary pressure by hiking Overnight Policy Rate in May 2010 by another 25 basis points to 2.5% to normalize the financial conditions and prevent any financial imbalances. Nonetheless, the current OPR rate is still accommodative and supportive of the economic recovery as it is still considerably lower than its height of 3.5% in 2006-2008. Consequently, the Malaysian ringgit continued to rise by another 1.1% in 2Q 2010 after having surged by 5% in 1Q 2010 against the USD. The interest rate hikes also bode well for bank earnings as borrowing rates usually rise faster than fixed deposit rates. This has partly prompted earnings upgrade for the KLCI since bank earnings contribute about 40% to KLCI’s earnings. On the other hand, announcements of NEM and 10MP aimed at transforming the economy generated interests in Malaysia equities especially services and construction sectors.

In view of the above, we have upgraded corporate earnings growth forecast for 2010 to 27.7% from 23.7% while 2011 earnings growth will be lower at 12.8% as compared to 15.2% owing to higher base. Valuation remains attractive with PE for 2010 and 2011 at 14.9X and 13.3X respectively. 

Australia (S&P / ASX 200; -16.3%)

While Australian equities delivered decent return in the first quarter, it witnessed a sharp fall in its second quarter. Taking into account both quarters and the fall in AUD, the market was the second worst performer with a return of -16.3%.

The Australian government’s proposal of Resource Super Profits Tax (RSPT) sparked concerns over the profit outlook of the Australian miners, which had been the largest beneficiaries of the Chinese rising commodity demand. Mining heavyweights in the stock index such as BHP and Rio Tinton suffered heavy selling in the second quarter. This controversial new tax has resulted in Australia’s Labor Party suffering a sharp drop in opinion polls, which in turn caused Kevin Rudd, the Former Prime Minister of Australia to step down on 24 June 2010. The market now turns the focus to the upcoming revised RSPT proposed by Julia Gillard, the new Prime Minister which is likely to be a watered down version. Apart from the domestic concerns, the deteriorating debt woes in Europe plus signs of a possible slowdown of Chinese economy have caused concerns on the strength of global economic recovery. A slower global economic growth would suggest weaker demand for commodities resulting in downward pressure for commodities prices. This hurt commodities focused Australian equity and AUD.

The benchmark S&P / ASX 200 index tumbled by 11.7% and the high-yield Australian dollar also plunged by 6.4% against the Rupee in the first half of 2010 amid a flight to safer assets. Having suffered a sharp decline in second quarter, valuations for S&P / ASX 200 are attractive at 11.2X and 10X 2010 and 2011 profits respectively.

Europe (Stoxx 600; -18.2%)

Europe was the worst performing market year-to-date as first half of 2010 draws to a conclusion, falling 18.2% year-to-date. The European market was one of the key highlights this year as Europe debt woes triggered both the corrections we have witnessed in 1H10. The largest decline was seen in mid-April’s sell-off which resulted in global equity markets falling below end 2009 levels. However, the significant decline in European asset investments is mainly contributed by a sharp decline in euro, which weakened by almost 15% against INR. When measured in local currency terms, the Stoxx 600 index fell only 4.2%, a sharp contrast compared to that measured in INR terms. The euro was greatly affected by Europe’s debt problems as the currency loses it status as the next alternative global currency after USD.

Interestingly, the rapid weakening of euro helped boost Europe’s exports out of Eurozone as it makes goods and services more competitive. The improved export contributed strongly to Eurozone’s GDP growth and in turn boosted companies’ revenue, particularly subsidiary earnings earned outside Eurozone. While the strength of euro is not expected to reverse in the near term, it seems to have found support at present level as the initial pessimisms over Europe’s debt woes modulated downwards after European leaders provided more clarity and measures aimed at containing and improving the current debt crisis. Based on consensus earnings estimate, Stoxx 600 is expected to grow by 34.3% and 19.9% in 2010 and 2011. This translates to a forward valuation of 11.0X and 9.2X price-to-earnings ratio as of end 2Q10, making Europe one of the lowest priced region. While global equity market (as represented by MSCI World) is down 10.9% in the first half of 2010, the scorecards for various regional equity markets differ greatly. The concerns on European debt concerns have weighed down on its currency, making it the worst performing markets while equity markets of the emerging economies, especially in Asia regions have performed well due to better economic fundamentals. In the second half, investors would have proceed cautiously in equity markets as the austerity measures taken in European countries would likely be a drag on global economic growth.





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