It’s definitely that time of year, and amid the flood of predictions for 2009 comes a bullish view of Asia’s prospects from Nomura – which, despite its strong push into markets elsewhere, is still very anxious to see a revival of sorts in Asian regional markets.
In an effort to make its research catchier, Nomura’s Asia-Pacific equity strategy team issued a report on Monday called “Titans, Heroes and Mortals.”
Incorporating the Graham and Dodd approach of value investing (favoured by Warren Buffett, and the subject of various books and papers) with its analysts’ key conviction calls, the Nomura research team split stocks into three camps it has cutely categorised as: Titans (“best of breed”), Heroes (“companies that can surprise investors and become best of breed”); and Mortals (“that will live forever in the shadow of the titans and heroes”).
The reason behind its timing, says Nomura, is that improving terms of trade, steep yield curves and pre-emptive policy responses to domestic credit freezing have left Asia in a “relatively decent position to weather the aftermath of the financial crisis”.Equities are likely to rise in response to changes in global corporate bond spreads and a weak greenback. Thereafter, the lagged impact of policy easing and inventory rebuild will be key.
In essence, US purchasing power relative to Asia, Europe and other emerging markets is falling as global demand is rebalanced, says Nomura:
Changes in the economic environment following the credit crunch are coming too fast to prevent a sharp decline in growth in 2009. The absence of risk capital has left many Asian assets mis-priced but with no discernible growth catalyst. Equities are set to rally on risk appetite returning, but then will be dependent on policymakers restoring the velocity of money.
Luckily, Nomura finds the notion of thrift increasingly paradoxical, as efforts to save merely lead to a decline in the velocity of money – and ultimately a deflationary shock. However, on the downside, it warns, post a bubble, “few companies tend to have control over their own destiny and equities will perform relatively badly against bonds”.
Among the themes to look out for in the year ahead, in Nomura’s view:An inventory restocking phase that causes a short-run supply squeeze; the greenback falls below its previous trade-weighted low and the credit rating of the US comes under renewed scrutiny, with Asia being invited to form a new global financial structure; companies return to saving, giving them increasing net cash positions while governments’ debt positions expand further; and emerging arbitrage opportunities amid a lack of risk capital within the region.
While Nomura’s economists have sharply cut their Asian forecasts as the financial crisis has unfolded, they have retained an upbeat outlook on China’s economic growth (8 per cent for the 2009 fiscal year), based on the view that monetary easing and fiscal pump-priming will offset the effects of an export slowdown.There have been no signs of a turnaround during the past quarter in purchasing management indices or export orders to suggest that Asian equity markets will sustain a rally on the back of changing growth expectations. Companies appear to be locked in a classic inventory build-up, since the demand shock did not allow them to adjust their production schedules quickly enough. Moreover, working capital requirements have tightened and trade finance remains difficult to obtain for exporters.
We entered the second half of 2008 with an Overweight stance on China and India, since both countries had low export-to-GDP ratios and were prime beneficiaries of falling commodity prices….We continue to have a bias in the short term toward value, since we can still find financial assets trading below intrinsic value or creditworthiness, such as convertible bonds. We would look to re-weight growth stocks as 4Q08F earnings are released and as companies guide down expectations further during 1Q09F. Our favoured sectors remain infrastructure beneficiaries.Region-wide, however, perhaps the biggest potential surprise, in Nomura’s view, is that while a demand shock has caused a significant deflationary scare, the corporate sector may be able to readjust its production schedules far more quickly than consensus is discounting: “Asian manufacturers, having operated through the deflationary post-1998 economic shock, have a far greater profit objective than investors may be acknowledging”.
Which brings us – or rather, Nomura – to Graham and Dodd: Under their value-investing principles, here are a few of Nomura’s “titans, heroes and mortals” from China, Korea, India, Taiwan and Singapore:
CHINA:
China Life Insurance – Titan
China Overseas Land & Invest – Titan
China Shenhua Energy – Titan
Hengan Intl Group – Titan
Ind & Comm Bk of China – Titan
Petrochina – Titan
Want Want China Holdings – Titan
ASM Pacific Technology – Hero
Beijing Enterprises Hldgs – Hero
China Oilfield Services-H – Hero
China South Locomotive – H -Hero
China Yurun Food Group – Hero
Datang Intl Power Gen – Hero
Hopewell Holdings – Hero
Huabao International Holding – Hero
Sun Hung Kai Properties – Hero
Tencent Holdings – Hero
Xinao Gas Holdings – Hero
ZTE Corp-H – Hero
Alibaba.com – Mortal
Brilliance China Automotive – Mortal
China Southern – Mortal
Dongfeng Motor – Mortal
Gome Electrical Appliances – Mortal
Kerry Props – Mortal
Swire Pacific Ltd ‘A’ – Mortal
INDIA:
Hindustan Unilever – Titan
Larsen & Toubro – Titan
NTPC – Titan
Reliance Industries – Titan
Sun Pharma – Titan
Glenmark – Hero
IVCRL Infra – Hero
Marico – Hero
Maruti Suzuki India – Hero
Piramal Healthcare – Hero
Tata Power – Hero
TVS – Mortal
Unitech – Mortal
KOREA:
KT&G Corp – Titan
SK Telecom – Titan
LGHH – Hero
Samsung Techwin – Hero
DSME – Mortal
Honam Petrochemical Corp – Mortal
Korea Electric Power Corp – Mortal
Korea Line Corp – Mortal
MALAYSIA:
IGB – Titan
Public Bank Bhd-Foreign MKT – Titan
AMMB Holdings – Hero
Bumiputra-Commerce Hldgs Bhd – Hero
Gamuda Bhd – Mortal
Malayan Banking Bhd – Mortal
SINGAPORE:
Keppel Corp – Titan
SembCorp Industries – Titan
SembCorp Marine – Titan
SingTel – Titan
ST Engineering – Titan
United Overseas Bank – Titan
Wilmar International – Titan
Mobile One – Hero
Noble Group – Hero
Venture Corp – Hero
COSCO Corp Singapore – Mortal
Hyflux – Mortal
Mapletree Logistics Trust – Mortal
SC Global Developments – Mortal
TAIWAN:
Acer Inc – Titan
Hon Hai Precision Industry – Titan
HTC Corp – Titan
Mediatek Inc – Titan
President Chain Store – Titan
Taiwan Semiconductor Mfg – Titan
Wistron – Titan
Compal Comm – Hero
Fubon FHC – Hero
CMO – Mortal
Huaku Development – Mortal
ProMOS Technologies Inc – Mortal
Wintek Corp – Mortal