Asian equities in 2018 Select 2018 June 2018 Medha Samant Investment Director, Asian Equities For investment professional use only and not for general public distribution.
Important information The value of investments can go down as well as up and investors may not get back the amount invested. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. Past performance is not a reliable indicator of future returns. 1 Asian equities in 2018
Asian market overview
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Fund flows Fund flows to Asia Pacific ex Japan (US$Bn) Fund flows to Developed Markets (US$Bn) 15 2013-2015 2016-2017 100 2013-2015 2016-2017 10 80 60 5 40 0 20-5 0-10 -20-40 -15-60 -20-80 Source: EPFR Global, Equity Funds Flow Database, Morgan Stanley. Data as of 16 May 2018. 3 Asian equities in 2018
P/E (x) P/B (X) Attractive valuations for equities in Asia ex-japan PE ratio close to long-term average 30 PB ratio remains close to average 3.5 25 3.0 20 2.5 2.0 15 14.7 1.5 1.7 10 1.0 5 0.5 Asia ex Japan Index (PE) Average +1 Stdev -1 Stdev Asia ex Japan Index (PB) Average +1 Stdev -1 Stdev Source: Thomson Reuters DataStream, 31 May 2018. PE ratio is Price to Earnings ratio and PB ratio is Price to Book value ratio. 4 Asian equities in 2018
China Hong Kong Korea Singapore Thailand Malaysia Taiwan Indonesia Philippines India Real Estate Energy Materials Technology Financials Industrials Staples Telcos Discretionary Utilities Health Care Sustained Asia ex-japan earnings revisions Asia ex Japan earnings upgrades Asia ex Japan Sectors EPS revisions over 12 months 140 130 2010 30% 20% 10% 2018E consensus EPS revision 120 110 100 2018 2017 0% -10% -20% 90 80 70 60 50 40 Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Asia ex Japan Countries EPS revisions over 12 months 20% 2018E consensus EPS revision 15% 10% 5% 0% -5% -10% EPS09E EPS10E EPS11E EPS12E EPS13E EPS14E EPS15E EPS16E EPS17E EPS18E Source: IBES Aggregate, Thomson Financials DataStream, 31 May 2018. These forecasts are not a reliable indicator of future performance. 5 Asian equities in 2018
US China trade war an unknown outcome Tariff and trade war news flow prompting uncertainty in the stock market. US-China trade war seems unlikely Both countries are key mutual trade partners, US not insulated. Bilateral negotiations, concessions likely middle path Trump announces $50bn in new tariffs on Chinese imports The world s two largest economies have taken a step closer to a trade war with the Trump administration on Friday unveiling new tariffs on $50bn in imports from China that will take effect within days. My great friendship with President Xi of China and our country s relationship with China are both very important to me, President Donald Trump said in a statement on Friday. Trade between our nations, however, has been very unfair, for a very long time. This situation is no longer sustainable. This material contains general information only, and should not be construed as a recommendation to buy or sell any security. Investors should note that the views expressed may no longer be current and may have already been acted upon. Source: Fidelity International, Thomson Reuters Datastream April 2018. Financial Times June 2018. 6 Asian equities in 2018
Opportunities in China
Urban population (% of total) The importance of China s rising middle class China s increasing middle class Annual disposable income per capita distribution Rising urbanisation rate 90 3% 7% 15% 80 53% 20% 70 60 55% 50 37% 40 11% 2015 2030 Low (<RMB 13K) Lower Middle (RMB 13K - 67K) Upper Middle (RMB 67K - 200K) High (>RMB 200K) 30 China UK US Source: EIU, November 2016, % of population, constant 2015 prices Source: Thomson Reuters, World Bank, 2017 8 Asian equities in 2018
China s Belt and Road initiative is gaining momentum Will all roads lead back to China? Source: AsiaOne, April 2015 9 Asian equities in 2018
China s IT companies are challenging global market leaders Annual sales volume of Huawei s smartphones Year Flagship Smartphone Models Selling Price for flagship models (in USD) Annual total sales volume (mn units) 2010 U8500 175~206 1.8 2011 U8800 286~349 17.1 2012 P1 349~444 29.1 2013 P6 Mate 349~429; 349~430 49.0 2014 P7 Mate 7 286~458; 407~587 73.8 2015 P8 Mate 8 301~458; 436~791 107.0 2016 P9 Mate 9 468~811; 499~1,323 139.3 2017 P10 Mate 10 577~821 150.0 Reference to specific securities is for illustration only and should not be construed as a recommendation to buy or sell these securities. Investors should note that the views expressed may no longer be current and may have already been acted upon. Source: Company data, Morgan Stanley. 10 Asian equities in 2018
% What should investors focus on when it comes to investing in China? A different mindset and focus free cash flow yield and dividend yield 6 5 4 3 2 1 0-1 -2-3 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Free Cash Flow Yield Dividend Yield Past performance is not indicative of future returns. Source: Fidelity International and Factset, July 2017. Data derived from a basket of Chinese stocks listed in China, HK and US. 11 Asian equities in 2018
Reforms in India
What to expect on economic reforms Big push towards affordable housing in rural and urban areas Strategic disinvestment in public sector companies (Air India, BEML, SAIL, etc.) Push for resolution of bad assets in the banking sector Focus on consolidation and execution 13 Asian equities in 2018
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Credit growth and private capex growth remains weak Bad asset problem close to resolution Weak credit growth 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Gross NPA Restrd SDR 5:25 S4A SR's Watchlist 14.9% 40% 35% 30% 25% 20% 15% 10% 5% 0% 10% Capacity utilisation rangebound Private sector capex recovery is delayed 76% 75% 74% 73% 72% 71% 70% 69% 68% 20 16 12 8 4 0 Public sector capex to GDP Private sector capex to GDP Source: Thomson Reuters DataStream, RBI data, March 2018. 14 Asian equities in 2018 Investors should note that the views expressed may no longer be current and may have already been acted upon.
Structural growth in ASEAN
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 ASEAN remain selective Improving fundamentals ASEAN s attractiveness vs. North Asia 140 Thailand economy is bottoming out, elections in 2019 130 120 110 Indonesia improving consumer sentiment, elections in 2019 100 90 80 Philippines government execution needed to drive infrastructure and consumption 70 60 50 Malaysia signs of stability, post election adjustment 40 Price: North Asia rel. to ASEAN This material contains general information only, and should not be construed as a recommendation to buy or sell any security. Source: Fidelity International, Thomson Reuters Datastream, April 2018 16 Asian equities in 2018
Summary Asian markets have outperformed over the past 18 months. In the absence of major global shocks they should continue to do so: the momentum of the earnings cycle remains robust, valuations are only mid range and the opportunities for stock pickers are significant. The relative political landscape continues to reflect increasing instability in liberal western democracies and a combination of democratic reform and strong leadership in Asia. India and China follow different models, but progress in both has been compelling. Whilst nominal growth is strong the Chinese economy needs to rebalance: the evidence suggests that is exactly what is happening. India s weakness remains credit growth. The recent recapitalisation of India s public banks is a good start, but the banking system also needs proper rationalisation and reform. 17 Asian equities in 2018
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