INVESTMENT COMMITTEE – ASIA

Michal Stupavský, CFA

Investment Strategist

4 August 2020
 Japan
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 JAPAN – HIGHLIGHTS

• According to Capital Economics Japan is expected to be a global outperformer…

• ...Japan’s low reliance on tourism, strong banks, healthy corporate balance sheets and
huge fiscal support should allow for a fairly rapid recovery by international standards.
Indeed, provided the recent uptick in new infections remains limited, we expect Japan
to be one of the few major economies where GDP will return to its pre-virus path by
the end of 2022…

• …Another reason to be optimistic about the outlook is the large fiscal response. Direct
fiscal spending of around ¥40tn (8% of GDP) is far larger than the stimulus provided
during the global financial crisis, and large by international comparison today.

• Equities overvalued

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 CURRENTLY SECOND WAVE OF CORONAVIRUS IN JAPAN

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 GDP – 1Q20: -0.6% Q/Q → OFFICIALLY IN RECESSION

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 CPI – JUNE: 0.1% (PREV. 0.1%)

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 BLOOMBERG CONSENSUS FORECASTS

2020 2021
GDP -4.9% (-4.9%) 2.5% (2.3%)
CPI -0.1% (0.0%) 0.2% (0.3%)

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 INDUSTRIAL PRODUCTION – MAY: -26.3% (PREV. -15.0%)

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 RETAIL SALES – JUNE: -1.2% (PREV. -12.5%)

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 MANUFACTURING PMI – JULY: 42.6 (PREV. 40.1)

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 SERVICES PMI – JULY: 45.2 (PREV. 45.0)

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 COMPOSITE PMI – JULY: 43.9 (PREV. 40.8)

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 CONSUMER CONFIDENCE – JUNE: 28.4 (PREV. 24.0)

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 FX USD/JPY: 105.20 → 2% APPRECIATION SINCE LAST IC AND 3% APPRECIATION YTD

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 FIXED-INCOME – GOVERNMENT BOND YIELDS (1/2) – 2-YEAR -0.16% → -0.15%

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 FIXED-INCOME – GOVERNMENT BOND YIELDS (2/2) – 10-YEAR 0.00% → 0.02%

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 EQUITIES PERFORMANCE – NIKKEI: -1% SINCE LAST IC AND -6% YTD

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 EQUITIES – NIKKEI VALUATION: P/E 27.5, 24% ABOVE LT AVERAGE OF 22.1

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 EQUITIES – NIKKEI VALUATION: P/B 1.7, 9% ABOVE LT AVERAGE OF 1.6

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 EQUITIES – NIKKEI VALUATION: P/S 1.1, 37% ABOVE LT AVERAGE OF 0.8

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 EQUITIES – NIKKEI COMPOSITE VALUATION: +24% → OVERVALUED

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 China
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 CHINA – HIGHLIGHTS

• According to Capital Economics China’s success in containing COVID-19 and the short
duration of its lockdown have enabled its economy to rebound rapidly. Output is already
back above the level of a year ago and most of Q1’s surge in unemployment has
reversed too. With policy support set to remain strong, China is on course to return to its
pre-virus path by the end of the year, far earlier than any other major economy…

• …Meanwhile, tensions with the US (and the West more generally) appear to be
escalating. President Trump will probably step up his anti-China rhetoric ahead of the US
election. The Phase One trade deal is a likely casualty and further sanctions, such as
against Chinese banks, cannot be ruled out.

• Equities undervalued

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 NEGLIGIBLE NEW CORONAVIRUS CASES

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 GDP – 2Q20: 3.2% (PREV. -6.8%)

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 CPI – JUNE: 2.5% (PREV. 2.4%)

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 BLOOMBERG CONSENSUS FORECASTS

2020 2021
GDP 2.0% (1.7%) 7.9% (8.0%)
CPI 2.7% (3.0%) 2.2% (2.1%)

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 INDUSTRIAL PRODUCTION – JUNE: 4.8% (PREV. 4.4%)

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 RETAIL SALES – JUNE: -1.8% (PREV. -2.8%)

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 MANUFACTURING PMI – JUNE – OFFICIAL AND CAIXIN – 50.9 & 51.2

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 SERVICES PMI – JUNE – OFFICIAL AND CAIXIN – 54.4 & 58.4

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 COMPOSITE PMI – JUNE – OFFICIAL AND CAIXIN – 53.4 & 54.5

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 FX USD/CNY: 7.00 → 1% APPRECIATION SINCE LAST IC AND 1% DEPRECIATION YTD

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 FIXED-INCOME – GOVERNMENT BOND YIELDS (1/2) – 2-YEAR 1.80% → 2.22%

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 FIXED-INCOME – GOVERNMENT BOND YIELDS (2/2) – 10-YEAR 2.68% → 2.84%

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 EQUITIES PERFORMANCE – CSI 300: +17% SINCE LAST IC AND +14% YTD

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 EQUITIES – CSI 300 VALUATION: P/E 15.9, 11% BELOW LT AVERAGE OF 17.8

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 EQUITIES – CSI 300 VALUATION: P/B 1.9, 21% BELOW LT AVERAGE OF 2.4

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 EQUITIES – CSI 300 VALUATION: P/S 1.5, 4% BELOW LT AVERAGE OF 1.5

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 EQUITIES – CSI COMPOSITE VALUATION: -12% → UNDERVALUED

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 India
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 INDIA – HIGHLIGHTS
• According to Capital Economics India has failed to contain the spread of the coronavirus,
the government’s fiscal response has been underwhelming and the banking sector is
already strained. Accordingly, the economy will suffer its largest drop in output on
record this year and the recovery is likely to be one of the weakest among major
economies…

• …The number of new virus cases is still on a sharp upward trajectory. So many
restrictions will need to remain in place for an extended period, limiting the pace of
recovery in domestic demand. In areas where virus cases are rising particularly fast, a re-
imposition of tighter measures is likely…

• …Demand-boosting measures amount to around 2% of GDP, far lower than in many

other countries.

• Equities fairly valued

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 NEW CORONAVIRUS CASES STILL INCREASING

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 GDP – 1Q20: 3.1% (PREV. 4.1%)

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 CPI – JUNE: 6.1% (PREV. 6.3%)

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 BLOOMBERG CONSENSUS FORECASTS

FY2021 FY2022
GDP -5.2% (-2.0%) 7.3% (7.1%)
CPI 4.3% (3.9%) 3.8% (4.0%)
Note: Fiscal year ends on 31 March.

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 INDUSTRIAL PRODUCTION – MAY: -34.7% (PREV. -57.6%)

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 MANUFACTURING PMI – JUNE: 47.2 (PREV. 30.8)

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 SERVICES PMI – JUNE: 33.7 (PREV. 12.6)

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 COMPOSITE PMI – JUNE: 37.8 (PREV. 14.8)

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 RBI REPURCHASE RATE – 40 BP CUT ON 22 MAY TO A NEW ALL-TIME LOW OF 4.0%

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 FX USD/INR: 74.8 → 2% APPRECIATION SINCE LAST IC AND 5% DEPRECIATION YTD

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 FIXED-INCOME – GOVERNMENT BOND YIELDS (1/2) – 2-YEAR 4.40% → 4.21%

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 FIXED-INCOME – GOVERNMENT BOND YIELDS (2/2) – 10-YEAR 6.16% → 5.88%

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 EQUITIES PERFORMANCE – SENSEX: +14 SINCE LAST IC AND -7% YTD

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 EQUITIES – SENSEX VALUATION: P/E 24.2, 28% ABOVE LT AVERAGE OF 18.8

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 EQUITIES – SENSEX VALUATION: P/B 2.6, 15% BELOW LT AVERAGE OF 3.1

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 EQUITIES – SENSEX VALUATION: P/S 2.4, 3% ABOVE LT AVERAGE OF 2.3

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 EQUITIES – SENSEX COMPOSITE VALUATION: +5% → FAIRLY VALUED

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Thanks!
Michal Stupavský, CFA
stupavsky@conseq.cz