(212 ( Delta One Marketing +852 2101 7283 Asia Pacific ETF Newsletter May 2011 Turning to Korea for Value Market Commentary 11 May 2011 Monthly Highlights ETF products continue to be the largest net buyers of Asia equities amongst all major fund types (Hedge Funds, Long- Only, and Quant Funds). (Source: Credit Suisse Portfolio & Derivatives Strategy team). CS Research believes there is still value in select sector/country cyclicals. We highlight several ETFs to trade Korea Tech and Consumer Discretionary. India has become one of the most over valued markets. INDIA SP remained fairly quiet after March redemptions and continues to trade at a discount to NAV. Credit Suisse has #1 trading volume market share in several of the largest ETFs: Emerging Markets (VWO US, EEM US), China (FXI US), Japan (EWJ US), and Asia Ex Japan (AAXJ US).* Most Borrowed ETFs * as per the RANK function on Bloomberg ETF borrow demand was more quiet for NJA in April. The only notable activity came from 2823 HK as people continue to use this as hedge to their long China A exposure. In Japan, ETFs tend to be less actively traded. However, we continue to see interest in Nikkei underlying ETFs such as 1321 JP (fairly liquid, borrow rate of 1.25%) and 1330 JP (less liquid, borrow rate of 5%). Source: Credit Suisse, Bloomberg ETF Trading Desk Flows Positive Sentiment for Asia For the past half year, ETF products have been the largest net buyers of Asian equities amongst all major fund types (Hedge Funds, Long-Only, and Quant Funds) (Source: Credit Suisse Portfolio & Derivatives Strategy team). Specifically in April, we saw 5.4x net creation vs. redemption flows. Net buying was also seen across all sectors and was the strongest in Financials (54% net buy), Information Technology (88% net buy), and Materials (64% net buy). Similar to last month, Korea and Hong Kong benefited from the largest net inflows (92% and 55% net buyers respectively). Inflows were also seen in Taiwan (96% net buyers) and Malaysia (93% net buyers) while Indonesia remained neutral and Australia saw net sellers (13%). In Singapore, we specifically saw inflows into STI-underlying ETFs (Straits Times Index) such as STTF SP and DBSSTI SP. A Share performance came in flat for the second month in a row (- 0.57% Shanghai SE Composite Index). However, we did see some decent creation flow in A Share ETFs such as 2823 HK. Daily volume remained steady despite 3 Hong Kong public holidays during the month. NAV premium levels were range-bound between 8%-12%. ETF Performance and AUM Changes Gold and Korea Shine in April The majority of the top ETF performers during April have underlying exposure to either gold or Korea. UTIGOL IN and 1328 JP had monthly returns of 8%, and REGOLD IN had a monthly return of 7%. Korea underlying ETFs such as 2835 HK (+ 8%), KSMKOREA IT (+7%) and 069500 KS (+7%) all performed well. The worst performing ETFs had underlying exposure to China: China SME (159902 CH) down 6%, Dacheng SZSE Growth 40 (159906 CH) down 4%, and DB X-trackers CSI300 (3049 HK) down 4%. The two largest global EM ETFs (EEM US, VWO US) benefited from AUM inflows this month (+5 % and 1% respectively). Japan underlying ETFs saw the largest outflows such as 1306 JP (-7% MoM) and 1320 JP (-9% MoM). New ETF Product Launches Several newly listed ETFs provide further ways to trade China equities (FCA US, 3033 HK, 3088 HK) and Australia equities (OZR AU, SSO AU). Additionally, Mirae launched several new Korea listed ETFs in April including a Precious Metal Futures ETF (139320 KS) and a Consumer Discretionary ETF (139290 KS).
Asia Pacific ETF Prior Month Market Statistics New APAC ETF Product Launches Credit Suisse Monthly Market Share Ranking Most Borrowed APAC ETFs Top 10 APAC ETFs by AUM Best 10 Monthly APAC ETF Performers Worst 10 Monthly APAC ETF Performers Top 10 APAC ETF Monthly AUM Inflows Top 10 APAC ETF Monthly AUM Outflows 2
Focusing on Korean tech & consumer discretionary Not only are these sectors at high discounts, but they also have significant upside on the back of production constraints in Japan. Korea also scores well (#3) on the latest HOLT Country Ranking Model May 2011. Exhibit 2: Korean Tech P/B v/s ROE relative to region Trade Ideas of the Month Asian Cyclicals - Identifying Value Asian Cyclical stocks have had a strong run. From November 2008 lows, they have outperformed defensives by about 80% in Asia and some valuations are now starting to look stretched. Exhibit 1: Asia ex-japan Cyclicals/Defensives relative price performance versus US ISM Recommended ETF Products: Korea Tech: 091160 KS, 091230 KS, 091200 KS Korea Cons. Disc.: 091180 KS, 136280 KS Korea Diversified: 138520 KS, 138530 KS & 138540 KS India Looking Expensive The country has been prone to intense inflationary pressures, leading the RBI to intervene & raise rates, slowing the pace of growth. As a result, there s been increased pressure on corporate earnings. Additionally, investor sentiment has been affected with the revelation of political & economic scandals. Exhibit 3: HOLT Country Ranking Model Valuation Some areas looking overvalued are Indonesian Coal, Chinese Metals & Cement and Palm Oil; however, Credit Suisse Research believes there is still value in select country-sector combinations. Some of the steepest discounts (by price-to-book versus ROE) are in Korean Tech (43%), Korean Consumer cyclicals (24%), Chinese Oils (8%), Korean Industrials (6%) and Australian Resources. (Related read: Asian Cyclicals by CS Asia Strategist - Sakthi Siva). India - A Pause in the Growth Story India has 28 states and 7 union territories which differ significantly in socio-economic parameters. The potential growth in underdeveloped states may make India attractive from a growth perspective in the longer-term, but in the near term, this growth is still not large enough to counter the slowdown in developed states. This makes India one of the most over valued markets (see sidebar on left for ETF trade ideas). The concentrated nature of the bell-weather sectors (construction, cement & real estate) in developed states worsens this perception. According to a report by CS India analyst Neelkanth Mishra on India Market Strategy, the market P/E (which is correlated to GDP growth) is likely to undershoot fair value. Exhibit 4: Correlation between GDP growth & index P/E Further read: CS Asia HOLT Country Ranking Recommended ETF Products: India related ETFs: EPI US, India SP, PIN US, 2810 HK, 2836 HK, INDY US, 1349 JP, LNFU SP, MXIS LN & KSMINDIA IT CS India ETFs : CSIN SW India 2x Leveraged Short-ETF: INDZ US India Banking Sector ETFs: PSUBBE IN & RBETF IN 3
Search for the Right ETF on EDGE With over hundreds of ETFs listed in Asia alone and thousands globally, traders now have plenty of options for getting exposure to different industries and even different asset classes. To find the right ETF for your portfolio: Visit our website at www.credit-suisse.com/edge. Select Trade Ideas > ETFs from the menu bar. Set search criteria, including keyword search (i.e. bond or dividend ). Find a Hedge EDGE also allows you to find an optimal set of ETFs to hedge a portfolio. For details, see our user guide ** Trade Idea Tools in EDGE ** Select Portfolios > List from the menu bar and upload a portfolio Select Portfolios > Risk from the menu bar. Select the ETFs to optimize, date range, and portfolio to optimize 4
More Analysis & Reports in EDGE: Our website Edge (http://www.creditsuisse.com/edge) contains many analytic tools for traders and PMs All Portfolio & Derivatives Strategy reports are available on Edge under Resources>Strategy Library You can also reach EDGE from the CS Research & Analytics site, on the Equities tab, under Further Analysis > EDGE (on the right-hand sidebar) Credit Suisse Asia Delta One Distribution Drew Blackburn +852 2101 7283 drew.blackburn@credit-suisse.com Julia Allen +852 2101 7077 julia.allen@credit-suisse.com Credit Suisse Asia Delta One Trading David Mansfield +852 2101 6249 david.mansfield@credit-suisse.com Manuel Schlabbers +852 2101 6249 manuel.schlabbers@credit-suisse.com Su Zhu +852 2101 6072 su.zhu@credit-suisse.com Alex Li +852 2101 7091 alexander.li@credit-suisse.com Credit Suisse Asia Portfolio Strategy Karan Karia +852 2101 6322 karan.karia@credit-suisse.com Rushil Khanna +852 2101 7840 rushil.khanna@credit-suisse.com Victor Lin +1 212 325 5281 victor.lin@credit-suisse.com For access to EDGE, contact Delta One Marketing CONTACTS & DISCLOSURE http://www.credit-suisse.com/legal_terms/market_commentary_disclaimer.shtml. This material has been prepared by individual traders or sales personnel of Credit Suisse (Hong Kong) Limited or its subsidiaries or affiliates ( Credit Suisse ) and not by the Credit Suisse research department. It is provided for informational purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of individual traders or sales personnel, which may be different from, or inconsistent with, the observations and views of Credit Suisse research department analysts, other Credit Suisse traders or sales personnel, or the proprietary positions of Credit Suisse. Observations and views expressed herein may be changed by the trader or sales personnel at any time without notice. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied is made regarding future performance. The information set forth above has been obtained from or based upon sources believed by the trader or sales personnel to be reliable, but each of the trader or sales personnel and Credit Suisse does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes in market factors. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view of a particular market. Credit Suisse may, from time to time, participate or invest in transactions with issuers of securities that participate in the markets referred to herein, perform services for or solicit business from such issuers, and/or have a position or effect transactions in the securities or derivatives thereof. The most recent Credit Suisse research on any company mentioned is at https://s.research-and-analytics.creditsuisse.com/login.asp. The services and financial products described in this material are provided by various affiliates or subsidiaries of Credit Suisse depending on your jurisdiction and in conformity with applicable laws, rules and regulations. This material is not directed to, nor intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse to any registration or licensing requirement within such jurisdiction. The provision of the services is subject to relevant local regulation and practice; the services described herein may not be available in your jurisdiction. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Credit Suisse Securities (Europe) Limited is authorised and regulated by the Financial Services Authority. This material has been issued and distributed in Australia by Credit Suisse Equities (Australia) Limited ABN 35 068 232 708 AFSL 237237 ( CSEAL ) for professional investors as defined in the Corporations Act (Cth) 2001. CSEAL is not an authorised deposit taking institution and products described herein do not represent deposits or other liabilities of Credit Suisse, Sydney Branch. Credit Suisse, Sydney Branch does not guarantee any particular rate of return on, or the performance of any products described. Copyright 2011 Credit Suisse Group AG, and/or its subsidiaries and affiliates. All rights reserved. 5