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Asia Equity Strategy
Research Analysts Sakthi Siva 65 6212 3027 firstname.lastname@example.org Kin Nang Chik 852 2101 7482 email@example.com
Cheapest four: Shanghai and India join; MSCI Hong Kong and Australia drop out
Figure 1: Countries on our P/BV vs ROE valuation model
35% 20% 5%
PB less ROE rel to Asia Pac ex-JP
Source: Company data, Credit Suisse estimates
■ India joins the Cheapest four club for the 15th time since 2000. Figure 1 highlights that Shanghai and India have now joined the Cheapest four club, replacing MSCI Hong Kong and Australia. For India, this is the 15th time since our valuation model started on 31 December 2000 that the country has joined the Cheapest four club. While history is not always an accurate guide to the future, Figure 2 under Focus charts highlights that in 13 of those 14 previous episodes, MSCI India outperformed MXASJ (MSCI Asia ex. Japan) after 12 months. The average outperformance after 12 months was 13% and the exception was the episode from 31 December 2003. ■ Shanghai joins the Cheapest four club for the second time since 2000. Shanghai joined the Cheapest four club for the first time ever on 6 December 2012 (see our report Expensive four club) and rose by 15% over the next two months. ■ The key risk is undervalued markets stay undervalued for longer than we expect. While history is not always an accurate guide to the future, since 31 December 2000, overweighting a basket of the four most undervalued markets has outperformed the MXASJ 90% of the time after 12 months.
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0 19.1 24.55 Rating Target price Market cap (US$ mn) Outperform Outperform Neutral Outperform 860.32 7.5% Source: Company data.00 9. See our report of 2 January 2012.0 4.26 3. Credit Suisse estimates Asia Equity Strategy 2 .43 2.1 20.00 1500.4 22. it outperformed the region (MSCI Asia ex.12 4. Japan or MXASJ) The average outperformance in those 14 previous episodes was 13% Average Source: Company data. Indian Tech best way to play this?) Figure 4: Indian Tech using our P/BV vs ROE valuation model Company Price (Local$) 1-Mar-13 722.5 7.1 21.908.09 ROE current 26.271 53. Credit Suisse estimates We are adding HCL tech and Wipro to the CS model portfolio (see report of 4 March.6 19.2% 34. India joins the Cheapest four club 4% premium Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 India .3 17. US capex and ISM new orders rise.499. similar to 31 December 2011.5% 19. Bloomberg.9% 61. Credit Suisse estimates 13.29 P/B low 08/09 1.1 2.895 30. MSCI.6 13.142 18. India Tech 19.2% 153.00 440 2700.45 1.PB vs ROE rel to APxJ Source: Company data.6 3.20 421.8% 24.20 2.0 Figure 3: India P/BV vs ROE relative to region The one exception was in the 12 months after 31 Dec 2003 (May 2004 Indian elections) 60% 40% 20% 0% -20% -40% -60% Dec-06 49% premium 32% premium India’s premium to the region has dropped to 4%.6% 70.05 March 2013 Focus charts and table Figure 2: Previous episodes when India joined the Cheapest four club—relative performance after 12 months India Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-08 Mar-09 Dec-11 Relative price performance after 12 months 9.3% 24.94 3. Figure 2 highlights that in 13 of the 14 previous episodes when India joined the Cheapest four club.6% HCL Technologies Wipro Infosys Tata Consultancy Svs.73 3.460 P/B rel less ROE rel to APxJ P/B current 3.6 -2.5 While history is not always an accurate guide to the future.
The first time was 6 December 2012 See our report of 6 December. Expensive four club)—and it rose by around 15% over the next 2 months. Expensive four club China (A-shares) Source: Company data. replacing MSCI Hong Kong and Australia. While history is not always an accurate guide to the future. Figure 2 under Focus charts highlights that in 13 of those 14 previous episodes. MSCI India outperformed MXASJ (MSCI Asia ex. it did rise by 15% over the next two months. See Figure 6 6 Dec 2012 1900 3-Dec-12 17-Dec-12 31-Dec-12 14-Jan-13 28-Jan-13 11-Feb-13 25-Feb-13 Shanghai SE Composite Source: Bloomberg Asia Equity Strategy 3 .05 March 2013 Cheapest four: Shanghai and India join. this is the 15th time since our valuation model started on 31 December 2000 that the country has joined the Cheapest four club. Figure 6: Shanghai composite 2500 2400 2300 2200 2100 2000 While we only have one episode previously when Shanghai was in the Cheapest four club. MSCI Hong Kong and Australia drop out India joins the Cheapest four club for the 15th time since 2000. Figure 5: China A—P/BV vs ROE relative to region 200% 150% 100% 50% 0% 4% premium -50% Jan-01 Jan-03 -24% Nov 2005 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Average 42% 188% premium at 2007 high India joins the Cheapest four club for the 15th time since 2000 Shanghai joins the Cheapest four club for only the second time since 2000. Credit Suisse estimates Shanghai joins the Cheapest four club for the 2nd time since 2000. Shanghai joined the Cheapest four club for the first time ever on 6 December (see our 6 December report. Figure 1 highlights that Shanghai and India have now joined the Cheapest four club. Japan) after 12 months. For India. The average outperformance after 12 months was 13% and the exception was the episode from 31 December 2003.
3% 5.3% 4.4% 6 mths since Mar-12 -4.6% 6 mths 2.0% 0.8% 0.5% 4.5% 0. Figure 7: Backtest results from overweighting the Cheapest four since 31 Dec 2000 Overweighting cheapest four countries Number of episodes with outperformance Number of episodes with underperformance 3 months 41 11 6 months 39 12 12 months 45 5 % of episodes with outperformance Average outperformance Source: Company data.4% 5.7% -3.4% 0. since 31 December 2000.0% 19.8% 0.0% 7.5% -2.1% 1.1% -28.1% 15.5% 15.2% 0.1% -1.8% 5.7% 2.4% 2.2% 1.3% 0.0% 20.9% -0.1% -2.3% 3.7% -10.2% 10.9% 0.2% -0.3% 4.8% 11.2% 3 mths 9.1% 0.9% 14.0% -1.0% 6 mths since Jun-12 17.1% 2. overweighting a basket of the four most undervalued countries has outperformed MXASJ (MSCI Asia ex.5% 1. Figure 8: Backtest results from 31 December 2011 (calendar year 2012 and so far in 2013) Absolute performance Dec-11 China Korea Hong Kong India Average Mar-12 China Hong Kong Korea Singapore Average Jun-12 China Korea Hong Kong Australia Average Sep-12 China Korea Hong Kong Singapore Average Dec-12 China Korea Australia Hong Kong Average -26.7% YTD -3.4% 23.2% 2.8% -0.8% 8.4% 7.3% -29.5% -31.9% 6.4% -17.5% 76% 4.5% 2.4% 13.3% -2.2% -3.4% 17. we do note that most of that occurred in the December quarter of 2012.3% 20.9% In 2012.2% 24.3% 8.5% -4.4% 7.9% YTD -0.4% -7.9% 4.3% 5.9% -14.8% 6.2% 1. but most of that occurred in the fourth quarter Relative performance 3 mths -1.2% 6 mths -2.1% 24.3% 3 mths -7.7% -15.7% -5. the cheapest four outperformed by 2.1% 3 mths 6.7% 6.9% While past performance is not necessarily a good guide to the future.8% 14.1% 3. overweighting a basket of the four most undervalued markets has outperformed MXASJ 90% of the time after 12 months. Figure 7 highlights that since 31 Dec 2000.8% 1.5% 5.5% 2.6% 6 mths 1.7% since Mar-12 -1.1% 7.6% 15. MSCI.7% 4.2% 6 mths -4.6% 5.1% 3 mths 4.4% 4.6% 1.8% -0.3% 1.9% 12mths 0. We do emphasise that historically the success rate is lower in the first three months at 79% and in the first six months at 76%.1% 5.7% 15.7% (bolded in Figure 8 below). While history is not always an accurate guide to the future.7% 16.8% 7.4% 3.7% 3.5% 2.7% 5.6% -1.3% 7.3% 16.5% 4. Japan) 90% of the time after 12 months While in 2012 the Cheapest four basket did outperform by 2.7% 0.3% 3 mths since Sep-12 12.5% 1.3% since Jun-12 -1.5% since Sep-12 3.8% 12.4% 1.0% 3.2% 90% 6.4% -14.5% 4.8% 8.0% 9.3% 4.5% 2.6% 23.7% -1.3% Source: Company data.4% -8.7%.05 March 2013 The key risk is undervalued markets stay undervalued for longer than we expect. Credit Suisse estimates 79% 2.4% 3 mths -4.7% -13.1% 1.8% 12mths 19.9% 21.1% 3 mths -0.2% 4. Credit Suisse estimates Asia Equity Strategy 4 . MSCI.0% 9.8% 2.6% -6.7% -0.6% 0.7% -30.7% -6.
Figure 9 highlights that the Cheapest four basket outperformed MXASJ by 5.0% 37.0% 7.8% -1. the cheapest four outperformed MXASJ by 5.5% 3 mths 6.9% 1.4% 2.6% in calendar year 2011 (bolded in Figure 9 below).0% 5.3% -10.3% 2.9% -14.5% -0. Credit Suisse estimates Figure 10 highlights that the Cheapest four basket (equally weighted) outperformed MXASJ by 16.9% 21.9% 5.8% -16. we acknowledge that our Overweight calls on MSCI China and Korea are yet to work.6% -20.6% -0.7% 1.9% in calendar year 2010.6% 1. See Figure 10 MSCI Hong Kong and Australia drop out of the Cheapest four club Asia Equity Strategy 5 .7% -18.3% -2.6% -0.0% 6 mths 2. While so far this year the cheapest four basket has outperformed by 0.5% 4. and Australia by 5.5% -16.8% 12mths 13.8% -5.4% 6.0% 6.4% -0.4% 12mths -12.2% (as of 1 March).5% -5.0% 3 mths 0.0% -0.3% 5.0% -2.9% 1.6% 6 mths -0.8% -2.3% 3.4% 12mths -6.4% 34.5% -1.4% -14.1% 4.1% 12mths 6. See Figure 9 Relative performance 3 mths 4.9% -11. Figure 9: Backtest results for calendar year 2011 Absolute performance Dec-10 Korea China Australia Thailand Average Mar-11 Korea China Australia Taiwan Average Jun-11 China Korea Thailand Hong Kong Average Sep-11 China Korea Hong Kong Thailand Average -22.6% -28.7% Source: Company data.5% -0.5% -19.7% 6 mths 6.8% 0.2% -9.1% 6 mths 18.3% 6 mths -1.7% -23.5% 7.9% 1.2% 6 mths -22. 30 September.9% 4.7% 7.0% 0. MSCI.4% 2. 30 June and 31 March.8% 24.3% 3 mths 8.5% -20.2% 3 mths -5.9%. This may explain why both MSCI Hong Kong and Australia have dropped out of the Cheapest four club.7% 0.4% 25.9% 3.6% 1.3% 3 mths 3.7% 12mths -3.9% 3.7% 15.4% -9. Figures 9 and 10 provide backtest results for calendar years 2011 and 2010.0% -15.7% 1.4% 1.4% 1.6% -1.5% 2.9% 2.2% 2.6% -15.3% -14.8% -0.8% 15.0% 18. Note that the backtesting is only done quarterly—31 December.3% -2. We do note that MSCI Hong Kong had outperformed by 1.3% 25.2% 0.9% -6.8% 6 mths 7.8% 21.2% 12mths -18.5% 15.0% -11.7% 11.8% -20.9% -11. In 2010.8% so far this year.3% -15.3% -0.9% 1.2% 23.3% -8.2% 1. the cheapest four outperformed MXASJ by 16.8% -5.1% 19.8% -1.7% -28.3% -22. respectively.05 March 2013 We can provide detailed backtest results from 31 December 2000 on request.6% 12mths 3.5% 3 mths 1.6%.1% -9.8% 3 mths -25.4% -15.5% 4.1% 5.7% 12mths -2.3% 1.2% 3.3% 6 mths -19.6% -13.2% -20.2% 3.6% -23.6% -7.5% In 2011.8% 1.2% 5.1%.1% 6.6% -21.4% 2.4% 7.8% -3.
9% 2.5% 15.6% 12.9% 5.9% -9.3% 17.2% 3.2% -22.5% 3 mths 5.6% -13.9% 17.4% 12.3% -7.0% 30.1% 3.8% 6 mths 26.6% 6 mths 18.0% Source: Company data.8% 3.0% 23.8% 20.5% 6 mths 10.8% -9.1% 30.9% 4.0% 3.7% 8.9% 6 mths 8.6% 8.0% 38.8% 2.8% 3 mths 17.8% 7.4% 12mths -7.9% 2.0% 7.1% 20.9% 4. MSCI.3% 14.1% 9.4% 32.3% 10.7% 38.2% -20.1% -6.5% -21.2% 9.6% 2.3% 31.7% 4.8% 28.3% 23.0% 2.5% 10.3% 5.9% 31.9% -23.8% 30.6% 2.9% 3.4% 12.9% 12mths 20.0% 10.9% 22.7% 9.2% -25.9% 12mths 41.2% -3.6% 3.3% 34.0% -27.9% -7.4% 3.05 March 2013 Figure 10: Backtest results for calendar year 2010 Absolute performance Dec-09 Thailand Philippines Indonesia Korea Average Mar-10 Thailand Korea Philippines China Average Jun-10 Korea Thailand Australia China Average Sep-10 Korea China Australia Taiwan Average -37.6% -7.2% 13.6% 2.3% 1.9% Relative performance 3 mths 10.2% 25.5% 10.1% 6.2% 3 mths -3.7% 13.8% 0.0% 8.2% 6 mths 32.0% -11.7% 3 mths 12.8% -3.8% 3.8% 6.8% 35.3% -12.5% 12.6% -5.2% 7.8% -12.9% 1.8% -12.2% 13.5% 6 mths 20.0% 11.4% -18.2% -6.7% -18.9% 6 mths 5.5% -4.0% 1.1% 12mths 31.3% 10.7% -2.0% 3 mths 12.4% 6.5% 1.0% -18.6% 3 mths 7.3% -6.3% 3.1% 5.4% 12mths 38.3% -12.8% 15.2% -5.4% 6 mths 19.0% 16.9% -22.8% 10.1% 12mths 50.3% 7. Credit Suisse estimates Asia Equity Strategy 6 .2% 23.1% 2.4% 9.5% 3 mths 0.6% 29.8% 12mths 12.3% 12mths 9.
Hold. 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.4) Wipro Ltd.SA. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector. however. the meanings are not the same. an d Underperform most closely correspond to Buy.2) Disclosure Appendix Important Global Disclosures I. R$8. respectively. and prior to 2nd October 2012 U. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. as our st ock ratings are determined on a relative basis. For Australian and New Zealand stocks.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions. Japanese ratings are based on a stock’s total return relative to the ana lyst's coverage universe which consists of all companies covered by the analyst within the relevant sector. with Outperforms representing the most attractive.BO. and Underperforms the least attractive investment opportunities. Neutrals the less attractive. Rs722. with Outperforms represen ting the most attractive. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.2) Infosys Limited (INFY. and other individual factors. An analyst may cov er multiple sectors. ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. (Please refer to definitions above. our stock ratings of Outperform.BO. during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. As of 2nd October 2012. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues. Neutrals the less attractive.) An investor's decision to buy or sell a security should be based on investment objectives. a portion of which are generated by Credit Suisse's investment banking activities As of December 10.BO. Credit Suisse policy and/or applicable law and regulations preclude certain types of communications. For Latin American and non-Japan Asia stocks. Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (54% banking clients) Neutral/Hold* 38% (47% banking clients) Underperform/Sell* 16% (39% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements. respectively.45) Tecnisa (TCSA3. U. 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7. Sakthi Siva. and Sell. (WIPR. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. Rs421. current holdin gs. including an investment recommendation. Neutral. The 15% and 7. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Asia Equity Strategy 7 .S. Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. New Zealand are.S.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition. Rs2908. and Underperforms the least attractive investment opportunities. Austr alia. Prior to 10th December 2012. respectively. Restricted (R) : In certain circumstances.05 March 2013 Companies Mentioned (Price as of 04-Mar-2013) HCL Technologies (HCLT. is or will be directly or indirectly related to the specific recommendations or views expressed in this report. certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was.
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Japan Investment Advisers Association. spot and forward interest and exchange rates). in Mexico by Banco Credit Suisse (México). Information. or of an investment adviser to provide investment advisory services to or on behalf of the municipality. This research may not conform to Canadian disclosure requirements. Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. accounting and legal advisors regarding any such services provided by CS. CS may have. service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. copied or distributed to any other party. in such securities or options thereon. Credit Suisse Equities (Australia) Limited. legal. In jurisdictions where CS is not already registered or licensed to trade in securities. including suggesting individual transactions or trades and entering into such transactions. participate or invest in financing transactions with the issuer(s) of the securities referred to in this report. available on request. Type II Financial Instruments Firms Association. INF010970631). between any municipality (including the officials. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. similarly it may prove difficult for you to obtain reliable information about the value. Japanese government guaranteed bonds. or intended for distribution to or use by. This report is being distributed in Germany by Credit Suisse Securities (Europe) This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC. T. publication. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available. Road. Worli. perform services for or solicit business from such issuers. it may make markets in the securities mentioned in the material presented in this report. value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. or contain hyperlinks to. or its affiliates. in consequence. Some investments may not be readily realisable and it may be difficult to sell or realise those investments. and may in the future issue. Credit Suisse Securities (Thailand) Limited. and reach different conclusions from. dealer. Director-General of Kanto Local Finance Bureau (Kinsho) No. The Financial Futures Association of Japan. Singapore Branch. but not limited to. which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Investment principal on bonds can be eroded depending on sale price or market price. and the credit quality of any issuer or reference issuer. which is regulated in the United Kingdom by The Financial Services Authority ("FSA"). subject to duties of confidentiality. country or other jurisdiction where such distribution. in such circumstances. directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. you will be requested to pay the purchase price only. or have provided within the previous 12 months. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker. nor its content. Credit Suisse Securities (Philippines ) Inc. Investors in securities such as ADR's. Ceejay House. unless specifically indicated otherwise. CS may have issued. initial capital paid to make the investment may be used as part of that income yield. without the prior express written permission of CS.S. All trademarks. Japanese municipal bonds. management. In connection with the provision of the any such services. One Cabot Square. S. is made regarding future performance. None of the material. or risks. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. Those communications reflect the different assumptions.S.
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